Dillard's 2012 Annual Report Download - page 27

Interest and debt expense, net. Interest and debt expense includes interest, net of interest
income, relating to the Company’s unsecured notes, mortgage note, term note, subordinated debentures
and borrowings under the Company’s credit facility. Interest and debt expense also includes gains and
losses on note repurchases, if any, amortization of financing costs and interest on capital lease
obligations.
Gain on litigation settlement. Gain on litigation settlement includes the proceeds received, net of
related expenses, from the settlement of a lawsuit with JDA Software Group.
Gain on disposal of assets. Gain on disposal of assets includes the net gain or loss on the sale or
disposal of property and equipment and the gain on the sale of an interest in a mall joint venture, if
any.
Asset impairment and store closing charges. Asset impairment and store closing charges consist
of write-downs to fair value of under-performing or held for sale properties and exit costs associated
with the closure of certain stores. Exit costs include future rent, taxes and common area maintenance
expenses from the time the stores are closed.
Income on (equity in losses of) joint ventures. Income on (equity in losses of) joint ventures
includes the Company’s portion of the income or loss of the Company’s unconsolidated joint ventures
as well as a distribution of excess cash from one of the Company’s mall joint ventures.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are also described in Note 1 of Notes to
Consolidated Financial Statements. As disclosed in that note, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America (‘‘GAAP’’)
requires management to make estimates and assumptions about future events that affect the amounts
reported in the consolidated financial statements and accompanying notes. The Company evaluates its
estimates and judgments on an ongoing basis and predicates those estimates and judgments on
historical experience and on various other factors that are believed to be reasonable under the
circumstances. Since future events and their effects cannot be determined with absolute certainty,
actual results could differ from those estimates.
Management of the Company believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in preparation of the Consolidated Financial
Statements.
Merchandise inventory. Approximately 96% of the Company’s inventories are valued at the lower
of cost or market using the last-in, first-out retail inventory method (‘‘LIFO RIM’’). Under LIFO RIM,
the valuation of inventories at cost and the resulting gross margins are calculated by applying a
calculated cost to retail ratio to the retail value of inventories. LIFO RIM is an averaging method that
is widely used in the retail industry due to its practicality. Inherent in the LIFO RIM calculation are
certain significant management judgments including, among others, merchandise markon, markups, and
markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting
gross margins. During periods of deflation, inventory values on the first-in, first-out retail inventory
method (‘‘FIFO RIM’’) may be lower than the LIFO RIM method. Additionally, inventory values at
LIFO RIM cost may be in excess of net realizable value. At February 2, 2013 and January 28, 2012, the
Company reduced the value of inventories on LIFO RIM to the FIFO RIM value, which approximates
market value. Cost of sales during fiscal 2012, 2011 and 2010 under both the FIFO RIM and LIFO
RIM methods was the same. The remaining 4% of the inventories are valued at the lower of cost or
market using the average cost or specific identified cost methods. A 1% change in the dollar amount of
markdowns would have impacted net income by approximately $10 million for fiscal 2012.
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