Dollar General 2010 Annual Report Download - page 124

10-K
final year-end LIFO inventory valuation. We also perform interim inventory analysis for determining
obsolete inventory. Our policy is to write down inventory to an LCM value based on various
management assumptions including estimated markdowns and sales required to liquidate such inventory
in future periods. Inventory is reviewed on a quarterly basis and adjusted as appropriate to reflect
write-downs determined to be necessary.
Factors such as slower inventory turnover due to changes in competitors’ practices, consumer
preferences, consumer spending and unseasonable weather patterns, among other factors, could cause
excess inventory requiring greater than estimated markdowns to entice consumer purchases, resulting in
an unfavorable impact on our consolidated financial statements. Sales shortfalls due to the above
factors could cause reduced purchases from vendors and 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.
We believe our estimates and assumptions related to merchandise inventories have generally been
accurate in recent years and we do not currently anticipate material changes in these estimates and
assumptions.
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 which in recent years have been
materially accurate. Although not currently anticipated, 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 accounting standards for goodwill and other intangible assets, we are required to test such
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.
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