Best Buy 2003 Annual Report Download - page 151

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles. In connection with
the preparation of the financial statements, we are required to make assumptions, make estimates and apply judgment that affect the
reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and
judgments on historical experience, current trends and other factors that management believes to be relevant at the time the
consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions,
estimates and judgments to ensure that our financial statements are presented fairly and in accordance with generally accepted
accounting principles. However, because future events and their effects cannot be determined with certainty, actual results could differ
from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in note 1 of the Notes to Consolidated Financial Statements on page 47. Management
believes that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial
results. Management has reviewed these critical accounting policies and related disclosures with our independent auditor and the
Audit Committee of our Board of Directors.
Inventory Reserves
We maintain inventory at the lower of cost or market. Markdown reserves are established based primarily on forecasted consumer
demand, inventory aging and technological obsolescence. If our estimates regarding consumer demand are inaccurate or changes in
technology impact demand for certain products in an unforeseen manner, we may be exposed to losses in excess of our established
reserves that could be material.
We also establish inventory loss reserves. Independent physical inventory counts are taken on a regular basis to ensure the amounts
reflected in our consolidated financial statements are properly stated. During the interim period between physical inventory counts, we
accrue for anticipated physical inventory losses on a location−by−location basis, based on a number of factors, including historical
results and current inventory loss trends.
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If our estimates regarding inventory losses are inaccurate, we may be exposed to losses in excess of our established reserves that could
be material.
We have not made any material changes in the accounting methodology used to establish our markdown or inventory loss reserves
during the past three years.
Long−Lived Assets
Long−lived assets such as property and equipment, intangible assets and investments are reviewed for impairment when events or
changes in circumstances indicate the carrying value of the assets may not be recoverable. When evaluating long−lived assets for
potential impairment, we first compare the carrying amount of the asset to the asset’s estimated future cash flows (undiscounted and
without interest charges). If the estimated future cash flows are less than the carrying amount of the asset, an impairment loss
calculation is completed. The impairment loss calculation compares the carrying amount of the asset to the asset’s estimated fair
value, which may be based on future cash flows (discounted and with interest charges). An impairment loss is recorded if the amount
of the asset’s carrying value exceeds the asset’s estimated fair value.
Our impairment loss calculation contains uncertainty because management must use judgment to forecast estimated fair values and to
determine the useful lives of the assets. If actual results are not consistent with our assumptions and estimates regarding these factors,
we may be exposed to losses that could be material.
Effective on March 3, 2002, we adopted SFAS No. 144. The adoption of SFAS No. 144 did not have a significant impact on our net
earnings or financial position. For further discussion regarding the financial impact subsequent to adoption, see the Significant
Accounting Matters section on page 22 and note 2 of the Notes to Consolidated Financial Statements on page 52.
Goodwill
We review goodwill for potential impairment annually and when events or changes in circumstances indicate the carrying value of the
goodwill might exceed its current fair value. We determine fair value using widely accepted valuation techniques, including
discounted cash flow and market multiple analyses. These types of analyses require us to make certain assumptions and estimates
regarding industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing
based on our most current business strategy in light of present industry and economic conditions, as well as future expectations. If
actual results are not consistent with our assumptions and estimates, we may be exposed to a goodwill impairment charge that could
be material.
Effective on March 3, 2002, we adopted the provisions of SFAS No. 142, which eliminated the systematic amortization of goodwill.
SFAS No. 142 also required that goodwill be reviewed for impairment at adoption and at least annually thereafter. For further
discussion regarding the financial impact of the initial adoption, see the Significant Accounting Matters section on page 22 and note 1