Dollar General 2008 Annual Report Download - page 55

53
associated vendor allowances that would also result in an unfavorable impact on our
consolidated financial statements.
We calculate our shrink provision based on actual physical inventory results during the
fiscal period and an accrual for estimated shrink occurring subsequent to a physical inventory
through the end of the fiscal reporting period. This accrual is calculated as a percentage of sales
at each retail store, at a department level, and is determined by dividing the book-to-physical
inventory adjustments recorded during the previous twelve months by the related sales for the
same period for each store. To the extent that subsequent physical inventories yield different
results than this estimated accrual, our effective shrink rate for a given reporting period will
include the impact of adjusting the estimated results to the actual results. Although we perform
physical inventories in virtually all of our stores on an annual basis, the same stores do not
necessarily get counted in the same reporting periods from year to year, which could impact
comparability in a given reporting period.
Goodwill and Other Intangible Assets. We amortize intangible assets over their estimated
useful lives unless such lives are deemed indefinite. If impairment indicators are noted,
amortizable intangible assets are tested for impairment based on projected undiscounted cash
flows, and, if impaired, written down to fair value based on either discounted projected cash
flows or appraised values. Future cash flow projections are based on management’ s projections.
Significant judgments required in this testing process may include projecting future cash flows,
determining appropriate discount rates and other assumptions. Projections are based on
management’ s best estimates given recent financial performance, market trends, strategic plans
and other available information. 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.
Under SFAS 142, “Goodwill and Other Intangible Assets,” we are required to test
goodwill and intangible assets with indefinite lives for impairment annually, or more frequently
if impairment indicators occur. The goodwill impairment test is a two-step process that requires
management to make judgments in determining what assumptions to use in the calculation. The
first step of the process consists of estimating the fair value of our reporting unit based on
valuation techniques (including a discounted cash flow model using revenue and profit forecasts)
and comparing that estimated fair value with the recorded carrying value, which includes
goodwill. If the estimated fair value is less than the carrying value, a second step is performed to
compute the amount of the impairment by determining an “implied fair value” of goodwill. The
determination of the “implied fair value” of goodwill would require us to allocate the estimated
fair value of our reporting unit to its assets and liabilities. Any unallocated fair value represents
the “implied fair value” of goodwill, which would be compared to its corresponding carrying
value.
We performed our annual impairment tests of goodwill and indefinite-lived intangible
assets during the third quarter of 2008 based on conditions as of the end of our second quarter,
and subsequently reviewed such results as of the end of 2008. These analyses indicated that no
impairment was necessary. We are not currently projecting a decline in cash flows that could be
expected to have an adverse effect such as a violation of debt covenants or future impairment
charges.