Dillard's 2002 Annual Report Download - page 34

arrangements as a new purchasing model that will enhance its merchandising decisions. Since the vendor allowances are directly
related to purchases, the Company accounts for such fixed discount arrangements as a reduction of inventoriable product cost. As the
Company moves toward the new purchasing model, it plans to continue to negotiate up-front discounts with its vendors. As such, the
Company is no longer viewing vendor markdown allowances as direct reductions of markdowns, but rather as overall vendor
discounts on inventory purchases, along with the up-front product discounts noted above. Accordingly, the Company has changed its
accounting method for markdown allowances to record such allowances as a reduction of inventoriable product cost. In addition, and
as a result of this change, the Company has also changed its method of accounting for certain retail price adjustments, from recording
such price adjustments as a reduction of initial mark-up to recording them as markdowns under the retail inventory method. The
Company believes that its change in accounting method will result in improved merchandising and buying decisions. The cumulative
effect of the accounting change as of January 30, 2000 was to decrease net income for fiscal year 2000 by $130 million, net of tax, or
$1.42 per share. The effect of adopting the new method was to increase both income before extraordinary item and net income for
fiscal 2000 in the amount of $30 million ($.33 per share).
Property and Equipment – Property and equipment owned by the Company is stated at cost, which includes related interest costs
incurred during periods of construction, less accumulated depreciation and amortization. Capitalized interest was $2.5 million, $5.4
million and $4.7 million in fiscal 2002, 2001 and 2000, respectively. For tax reporting purposes, accelerated depreciation or cost
recovery methods are used and the related deferred income taxes are included in noncurrent deferred income taxes in the Consolidated
Balance Sheets. For financial reporting purposes, depreciation is computed by the straight-line method over estimated useful lives:
Buildings and leasehold improvements 20 - 40 years
Furniture, fixtures and equipment 3 - 10 years
Properties leased by the Company under lease agreements which are determined to be capital leases are stated at an amount equal to
the present value of the minimum lease payments during the lease term, less accumulated amortization. The properties under capital
leases and leasehold improvements under operating leases are amortized on the straight-line method over the shorter of their useful
lives or the related lease terms. The provision for amortization of leased properties is included in depreciation and amortization
expense.
Included in property and equipment as of February 1, 2003 are assets held for sale in the amount of $35.9 million. During fiscal 2002,
2001 and 2000, the Company realized gains on the sale of property and equipment of $1.1 million, $2.1 million and $7.8 million,
respectively.
Depreciation expense on property and equipment was $301 million, $295 million and $287 million for fiscal 2002, 2001 and 2000,
respectively.
Long-lived Assets Excluding Goodwill – The Company follows SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” which requires impairment losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying
amount. In the evaluation of the fair value and future benefits of long-lived assets, the Company performs an analysis of the
anticipated undiscounted future net cash flows of the related long-lived assets. This analysis is performed at the store unit level. If
the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various
factors including future sales growth and profit margins are included in this analysis. Management believes at this time that the
carrying value and useful lives continue to be appropriate, after recognizing the impairment charge recorded in 2002, as disclosed in
Note 13.
Goodwill – The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective February 3, 2002. It changes
the accounting for goodwill from an amortization method to an “impairment only” approach. Under SFAS No. 142, goodwill is no
longer amortized but reviewed for impairment annually or more frequently if certain indicators arise. The Company tested goodwill
for impairment as of the adoption date using the two-step process prescribed in SFAS No. 142. The Company identified its reporting
units under SFAS No. 142 at the store unit level. The fair value of these reporting units was estimated using the expected discounted
future cash flows and market values of related businesses, where appropriate. Prior to the adoption of SFAS No. 142, goodwill, which
represents the cost in excess of fair value of net assets acquired, was amortized on the straight-line basis over 40 years. Accumulated
goodwill amortization was $55.6 million at February 2, 2002. Management believes at this time that the carrying value continues to
be appropriate, recognizing the impairment charge recorded in 2002, as disclosed in Note 2.
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