Dillard's 2015 Annual Report Download - page 26

20
Payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred.
Amounts of margin maintenance allowances are recorded only when an agreement has been reached with the vendor and
the collection of the concession is deemed probable. All such merchandise margin maintenance allowances are recognized as a
reduction of cost purchases. Under the retail inventory method, a 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 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 30, 2016 and January 31, 2015, insurance accruals of $44.4 million and $45.9 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 2015 and 2014, 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 $3.0 million for fiscal 2015.
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;
• A current-period operating or cash flow loss combined with a history of operating or cash flow losses; and
• Store closings.
The Company performs an analysis of the anticipated undiscounted future net cash flows of the related long-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, settlements of tax audits 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.
Changes in the Company's assumptions and judgments can materially affect amounts recognized in the consolidated balance
sheets and statements of income.
The total amount of unrecognized tax benefits as of January 30, 2016 and January 31, 2015 was $4.3 million and
$4.8 million, respectively, of which $2.5 million and $2.6 million, respectively, would, if recognized, affect the Company's
effective tax rate. The Company does not expect a significant change in unrecognized tax benefits in the next twelve months.
The Company classifies accrued interest expense and penalties relating to income tax in the consolidated financial statements
as income tax expense. The total amounts of interest and penalties were not material.
The fiscal tax years that remain subject to examination for the federal tax jurisdiction are 2013 and forward and for major
state tax jurisdictions are 2012 and forward. At this time, the Company does not expect the results from any income tax audit to
have a material impact on the Company's consolidated financial statements.
Pension obligations. The discount rate that the Company utilizes for determining future pension obligations is based on
the Citigroup Above Median Pension Index Curve on its annual measurement date and is matched to the future expected cash
flows of the benefit plans by annual periods. The discount rate increased to 4.2% as of January 30, 2016 from 3.5% as of
January 31, 2015. We believe that these assumptions have been appropriate and that, based on these assumptions, the pension
liability of $184.8 million is appropriately stated as of January 30, 2016; however, actual results may differ materially from