Walmart 2014 Annual Report Download - page 34

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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, 2014 and 2013, we had
£2.5 billion of outstanding long-term debt designated as a hedge of our
net investment in the United Kingdom. At January 31, 2014, a hypothetical
10% increase or decrease in the 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 $375 million. In addition, we had outstanding long-term debt of
¥200 billion at January 31, 2014 and ¥275 billion at January 31, 2013, that
was designated as a hedge of our net investment in Japan. At January 31,
2014, 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 $177 million.
Other Matters
We discuss our existing FCPA investigation and related matters in
the Annual Report on Form 10-K for scal 2014, 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 fol-
low 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 segment are primarily valued by the retail method
of accounting and are stated using the rst-in, rst-out (“FIFO”) method.
Under the retail method of accounting, 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
of accounting requires management 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 ability to sell 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 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, 2014 and 2013, our inventories valued at LIFO
approximated those inventories as if they were valued at FIFO.
We provide for estimated inventory losses, or 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
indicators 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 markets, 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 indi-
cators of impairment 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 related long-lived assets.
Goodwill and other indenite-lived acquired intangible assets are not
amortized, but are evaluated for impairment annually or whenever
events or changes in circumstances indicate that the value of a certain
asset may be impaired. Generally, this evaluation begins with a qualita-
tive assessment to determine whether a quantitative impairment test is
necessary. If we determine, after performing an assessment based on the
32 Walmart 2014 Annual Report