Dollar General 2007 Annual Report Download - page 49

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Changes in these estimates and assumptions could materially affect the determination of fair
value or impairment. Future indicators of impairment could result in an asset impairment charge.
Purchase Accounting. The Merger was accounted for as a reverse acquisition in
accordance with the purchase accounting provisions of SFAS 141, “Business Combinations,”
under which our assets and liabilities have been accounted for at their estimated fair values as of
the date of the Merger. The aggregate purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed, based upon an assessment of their relative fair values as
of the date of the Merger. These estimates of fair values, the allocation of the purchase price and
other factors related to the accounting for the Merger are subject to significant judgments and the
use of estimates.
Property and Equipment. Property and equipment are recorded at cost. We group our
assets into relatively homogeneous classes and generally provide for depreciation on a straight-
line basis over the estimated average useful life of each asset class, except for leasehold
improvements, which are amortized over the shorter of the applicable lease term or the estimated
useful life of the asset. Certain store and warehouse fixtures, when fully depreciated, are
removed from the cost and related accumulated depreciation and amortization accounts. The
valuation and classification of these assets and the assignment of useful depreciable lives
involves significant judgments and the use of estimates.
Impairment of Long-lived Assets. We review the carrying value of all long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. In accordance with Statement of Financial Accounting
Standards (“SFAS”) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
we review for impairment stores open more than two years for which current cash flows from
operations are negative. Impairment results when the carrying value of the assets exceeds the
undiscounted future cash flows over the life of the lease. Our estimate of undiscounted future
cash flows over the lease term is based upon historical operations of the stores and estimates of
future store profitability which encompasses many factors that are subject to variability and are
difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for
impairment is equal to the difference between the carrying value and the asset’ s fair value. The
fair value is estimated based primarily upon future cash flows (discounted at our credit adjusted
risk-free rate) or other reasonable estimates of fair market value.
Insurance Liabilities. We retain a significant portion of the risk for our workers’
compensation, employee health insurance, general liability, property loss and automobile
coverage. These costs are significant primarily due to the large employee base and number of
stores. At the date of the Merger this liability was discounted in accordance with purchase
accounting standards. Subsequent to the Merger, provisions are made to this insurance liability
on an undiscounted basis based on actual claim data and estimates of incurred but not reported
claims developed using actuarial methodologies based on historical claim trends. If future claim
trends deviate from recent historical patterns, we may be required to record additional expenses
or expense reductions, which could be material to our future financial results.