Walmart 2013 Annual Report Download - page 31

Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Walmart 2013 Annual Report || 29
As of January 31, 2013, our variable rate borrowings, including the e ect
of our commercial paper and interest rate swaps, represented 23% of our
total short-term and long-term debt. Based on January 31, 2013 debt
levels, a 100 basis point change in prevailing market rates would cause
our annual interest costs to change by approximately $47 million.
Foreign Currency Risk
We are exposed to  uctuations in foreign currency exchange rates as
a result of our net investments and operations in countries other than
the United States. We hedge a portion of our foreign currency risk by
entering into currency swaps and designating certain foreign-currency-
denominated long-term debt as net investment hedges.
We hold currency swaps to hedge the currency exchange component
of our net investments and also to hedge the currency exchange rate
 uctuation exposure associated with the forecasted payments of princi-
pal and interest of non-U.S. denominated debt. The aggregate fair value
of these swaps was in an asset position of $453 million and $313 million
at January 31, 2013 and 2012, respectively. A hypothetical 10% increase or
decrease in the currency exchange rates underlying these swaps from
the market rate at January 31, 2013 would have resulted in a loss or gain
in the value of the swaps of $241 million. A hypothetical 10% change in
interest rates underlying these swaps from the market rates in e ect at
January 31, 2013 would have resulted in a loss or gain in value of the
swaps of $51 million.
In addition to currency swaps, we have designated foreign-currency-
denominated long-term debt as nonderivative hedges of net investments
of certain of our foreign operations. At January 31, 2013 and January 31,
2012, we had £2.5 billion and £3.0 billion, respectively, of outstanding
long-term debt designated as a hedge of our net investment in the
United Kingdom. At January 31, 2013, a hypothetical 10% increase or
decrease in value of the U.S. dollar relative to the British pound would
have resulted in a gain or loss in the value of the debt of $360 million.
In addition, we have outstanding long-term debt of ¥275 billion at
January 31, 2013 and January 31, 2012, that was designated as a hedge
of our net investment in Japan. At January 31, 2013, a hypothetical 10%
increase or decrease in value of the U.S. dollar relative to the Japanese yen
would have resulted in a gain or loss in the value of the debt of $273 million.
Other Matters
We discuss our existing FCPA investigation and related matters in the
Annual Report on Form 10-K for  scal 2013, including certain risks arising
therefrom, in Part I, Item 1A of the Form 10-K under the caption “Risk
Factors” and in Note 10 to our Consolidated Financial Statements, which is
captioned “Contingencies,” under the sub-caption “FCPA Investigation
and Related Matters.” We also discuss various legal proceedings related to
the FCPA investigation in Item 3 of the Form 10-K under the caption “Item 3.
Legal Proceedings,” under the sub-caption “II. Certain Other Proceedings.”
Summary of Critical Accounting Estimates
Management strives to report our  nancial results in a clear and
understandable manner, although in some cases accounting and
disclosure rules are complex and require us to use technical terminology.
In preparing the Company’s Consolidated Financial Statements, we
follow accounting principles generally accepted in the United States.
These principles require us to make certain estimates and apply judgments
that a ect our  nancial position and results of operations as re ected in
our  nancial statements. These judgments and estimates are based on
past events and expectations of future outcomes. Actual results may
di er from our estimates.
Management continually reviews our accounting policies, how they
are applied and how they are reported and disclosed in our  nancial
statements. Following is a summary of our critical accounting estimates
and how they are applied in preparation of the  nancial statements.
Inventories
We value inventories at the lower of cost or market as determined
primarily by the retail method of accounting, using the last-in,  rst-out
(“LIFO”) method for substantially all of the Walmart U.S. segment’s
merchandise inventories. The retail method of accounting results in
inventory being valued at the lower of cost or market since permanent
markdowns are currently taken as a reduction of the retail value of
inventory. The Sam’s Club segment’s merchandise is valued based on
the weighted-average cost using the LIFO method. Inventories for the
Walmart International operations are primarily valued by the retail method
of accounting and are stated using the  rst-in,  rst-out (“FIFO”) method.
Under the retail method, inventory is stated at cost, which is determined
by applying a cost-to-retail ratio to each merchandise grouping’s retail
value. The FIFO cost-to-retail ratio is generally based on the  scal year
purchase activity. The cost-to-retail ratio for measuring any LIFO provision
is based on the initial margin of the  scal year purchase activity less the
impact of any permanent markdowns. The retail method requires man-
agement to make certain judgments and estimates that may signi cantly
impact the ending inventory valuation at cost, as well as the amount of
gross pro t recognized. Judgments made include recording markdowns
used to sell inventory and shrinkage. When management determines the
salability of inventory has diminished, markdowns for clearance activity
and the related cost impact are recorded. Factors considered in the
determination of markdowns include current and anticipated demand,
customer preferences and age of merchandise, as well as seasonal and
fashion trends. Changes in weather patterns and customer preferences
related to fashion trends could cause material changes in the amount
and timing of markdowns from year to year.
When necessary, we record a LIFO provision for the estimated annual
e ect of in ation, and these estimates are adjusted to actual results
determined at year-end. Our LIFO provision is calculated based on
inventory levels, markup rates and internally generated retail price
indices. At January 31, 2013 and 2012, our inventories valued at LIFO
approximated those inventories as if they were valued at FIFO.
We provide for estimated inventory losses (“shrinkage”) between
physical inventory counts on the basis of a percentage of sales.
Following annual inventory counts, the provision is adjusted to re ect
updated historical results.
Impairment of Assets
We evaluate long-lived assets other than goodwill and assets with
inde nite lives for indicators of impairment whenever events or changes
in circumstances indicate their carrying amounts may not be recoverable.
Management’s judgments regarding the existence of impairment indi-
cators are based on market conditions and operational performance,
such as operating income and cash  ows. The evaluation for long-lived
assets is performed at the lowest level of identi able cash  ows, which is
generally at the individual store level or, in certain circumstances, at the
market group level. The variability of these factors depends on a number
of conditions, including uncertainty about future events and changes in
demographics. Thus, our accounting estimates may change from period
to period. These factors could cause management to conclude that
impairment indicators exist and require impairment tests be performed,
which could result in management determining the value of long-lived
assets is impaired, resulting in a write-down of the long-lived assets.