Dollar General 2011 Annual Report Download - page 149

10-K
Impairment of Long-lived Assets. We review the carrying value of long-lived assets for impairment
at least annually, and whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. In accordance with accounting standards for impairment or disposal
of long-lived assets, we review for impairment stores open for approximately two years or more for
which recent cash flows from operations are negative. Impairment results when the carrying value of
the assets exceeds the estimated 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 estimated fair value.
The fair value is estimated based primarily upon projected future cash flows (discounted at our credit
adjusted risk-free rate) or other reasonable estimates of fair market value in accordance with
U.S. GAAP. During 2011, 2010 and 2009 we recorded pre-tax impairment charges of $1.0 million,
$1.7 million and $5.0 million, respectively, for certain store assets that we deemed to be impaired.
Insurance Liabilities. We retain a significant portion of the risk for our workers’ compensation,
employee health, property loss, automobile and general liability. These represent significant costs
primarily due to the large employee base and number of stores. Provisions are made to these liabilities
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, which have been and are
anticipated to continue to be materially accurate. 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.
Contingent Liabilities—Income Taxes. Income tax reserves are determined using the methodology
established by accounting standards relating to uncertainty in income taxes. These standards require
companies to assess each income tax position taken using a two step process. A determination is first
made as to whether it is more likely than not that the position will be sustained, based upon the
technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the
more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is
greater than 50% likely to be realized upon ultimate settlement of the respective tax position.
Uncertain tax positions require determinations and estimated liabilities to be made based on provisions
of the tax law which may be subject to change or varying interpretation. If our determinations and
estimates prove to be inaccurate, the resulting adjustments could be material to our future financial
results.
Contingent Liabilities—Legal Matters. We are subject to legal, regulatory and other proceedings
and claims. We establish liabilities as appropriate for these claims and proceedings based upon the
probability and estimability of losses and to fairly present, in conjunction with the disclosures of these
matters in our financial statements and SEC filings, management’s view of our exposure. We review
outstanding claims and proceedings with external counsel to assess probability and estimates of loss. We
re-evaluate these assessments on a quarterly basis or as new and significant information becomes
available to determine whether a liability should be established or if any existing liability should be
adjusted. The actual cost of resolving a claim or proceeding ultimately may be substantially different
than the amount of the recorded liability. In addition, because it is not permissible under U.S. GAAP
to establish a litigation liability until the loss is both probable and estimable, in some cases there may
be insufficient time to establish a liability prior to the actual incurrence of the loss (upon verdict and
judgment at trial, for example, or in the case of a quickly negotiated settlement).
Lease Accounting and Excess Facilities. Many of our stores are subject to build-to-suit
arrangements with landlords, which typically carry a primary lease term of 10-15 years with multiple
renewal options. We also have stores subject to shorter-term leases and many of these leases have
49