Dillard's 2005 Annual Report Download - page 23

Merchandise vendor allowances. The Company receives concessions from its merchandise vendors
through a variety of programs and arrangements, including co-operative advertising, payroll reimbursements and
markdown reimbursement programs. Co-operative advertising allowances are reported as a reduction of
advertising expense in the period in which the advertising occurred. Payroll reimbursements are reported as a
reduction of payroll expense in the period in which the reimbursement occurred. All other merchandise vendor
allowances are recognized as a reduction of cost purchases when received. Accordingly, a reduction or increase
in vendor concessions has an inverse impact on cost of sales and/or selling and administrative expenses. The
amounts recognized as a reduction in cost of sales have not varied significantly over the past three fiscal years.
Insurance accruals.The Company’s consolidated balance sheets include liabilities with respect to self-
insured workers’ compensation and general liability claims. The Company estimates the required liability of such
claims, utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our
historical loss experience, projected loss development factors, actual payroll and other data. The required liability
is also subject to adjustment in the future based upon the changes in claims experience, including changes in the
number of incidents (frequency) and changes in the ultimate cost per incident (severity). Adjustments to earnings
resulting from changes in historical loss trends have been insignificant for the years ended January 28, 2006 and
January 29, 2005. Further, we do not anticipate any significant change in loss trends, settlements or other costs
that would cause a significant change in our earnings. A 10% change in our self-insurance reserve would have
affected net earnings by $5 million for the fiscal year ended January 28, 2006.
Finite-lived assets.The Company’s judgment regarding the existence of impairment indicators is based on
market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets,
whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we
consider important which could trigger an impairment review include the following:
• Significant changes in the manner of our use of assets or the strategy for our overall business;
• Significant negative industry or economic trends; or
• Store closings.
The Company performs an analysis of the anticipated undiscounted future net cash flows of the related
finite-lived assets. 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. The Company currently has 15 stores that based on current cash flow projections are not impaired
but do have recovery periods that extend a number of years. To the extent these future projections or the
Company’s strategies change, the conclusion regarding impairment may differ from the current estimates.
Goodwill.The Company evaluates goodwill annually and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable from its estimated future cash flows. To the extent these
future projections or our strategies change, the conclusion regarding impairment may differ from the current
estimates.
Estimates of fair value are primarily determined using projected discounted cash flows and are based on our
best estimate of future revenue and operating costs and general market conditions. These estimates are subject to
review and approval by senior management. This approach uses significant assumptions, including projected
future cash flows, the discount rate reflecting the risk inherent in future cash flows, and a terminal growth rate.
Income taxes. Temporary differences arising from differing treatment of income and expense items for tax
and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet.
These balances, as well as income tax expense, are determined through management’s estimations, interpretation
of tax law for multiple jurisdictions and tax planning. If the Company’s actual results differ from estimated
results due to changes in tax laws, new store locations or tax planning, the Company’s effective tax rate and tax
balances could be affected. As such these estimates may require adjustment in the future as additional facts
become known or as circumstances change.
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