Dillard's 2004 Annual Report Download - page 43

Merchandise Inventories – The retail last-in, first-out (“LIFO”) inventory method is used to value merchandise
inventories. At January 29, 2005 and January 31, 2004, the LIFO cost of merchandise was approximately equal to the
first-in, first-out (“FIFO”) cost of merchandise.
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 $4.5 million, $2.6 million and $2.5 million in fiscal 2004, 2003 and 2002, respectively. 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 January 29, 2005 are assets held for sale in the amount of $7.7 million. During
fiscal 2004, 2003 and 2002, the Company realized gains on the sale of property and equipment of $2.9 million, $8.7
million and $1.1 million, respectively.
Depreciation expense on property and equipment was $302 million, $291 million and $301 million for fiscal 2004, 2003
and 2002, 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 which is based on expected discounted future cash flows. 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 charges recorded in
2004, 2003 and 2002, as disclosed in Note 14.
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 fiscal 2004, 2003 and 2002, as disclosed in Note 3.
Other Assets – Other assets include investments in joint ventures accounted for by the equity method. These joint
ventures, which consist of malls and a general contracting company that constructs Dillard’s stores and other commercial
buildings, had carrying values of $116 million and $97 million at January 29, 2005 and January 31, 2004, respectively.
The malls are located in Yuma, Arizona; Toledo, Ohio; Denver, Colorado and one currently under construction in Bonita
Springs, Florida. Earnings from joint ventures were $8.7 million, $8.1 million and $19.5 million for fiscal 2004, 2003
and 2002, respectively. The Company also recorded a $15.6 million pretax gain for the year ended January 31, 2004
from the sale of its interest in Sunrise Mall and its associated center in Brownsville, Texas for $80.7 million including
the assumption of the $40.0 million mortgage note. The Company recorded a pretax gain of $64.3 million pertaining to
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