Dillard's 2010 Annual Report Download - page 25

portion of these allowances reduces cost of goods sold and a portion reduces the carrying value of
merchandise inventory.
Insurance accruals. The Company’s consolidated balance sheets include liabilities with respect to
claims for self-insured workers’ compensation (with a self-insured retention of $4 million per claim)
and general liability (with a self-insured retention of $1 million per claim and a one-time $1 million
corridor). The Company’s retentions are insured through a newly-formed, wholly-owned captive
insurance subsidiary. 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). As of
January 29, 2011 and January 30, 2010, insurance accruals of $52.9 million and $51.7 million,
respectively, were recorded in trade accounts payable and accrued expenses and other liabilities.
Adjustments resulting from changes in historical loss trends have helped control expenses during fiscal
2010 and 2009, partially due to Company programs that have helped decrease both the number and
cost of claims. 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 $3.4 million for fiscal 2010.
Long-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 the 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. To the extent these future projections or the Company’s strategies
change, the conclusion regarding impairment may differ from the current estimates.
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, changes in 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.
The total amount of unrecognized tax benefits as of January 29, 2011 and January 30, 2010 was
$9.1 million and $18.2 million, respectively, of which $6.3 million and $13.8 million, respectively, would,
if recognized, affect the effective tax rate. The Company classifies accrued interest expense and
penalties relating to income tax in the consolidated financial statements as income tax expense. The
total interest and penalties recognized in the consolidated statements of operations as of January 29,
2011, January 30, 2010 and January 31, 2009 was $(2.3) million, $(2.0) million, and $0.6 million,
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