Famous Footwear 2012 Annual Report Download - page 41

2012 BROWN SHOE COMPANY, INC. FORM 10-K 39
We are audited periodically by domestic and foreign tax authorities and tax assessments may arise several years after tax
returns have been filed. Tax liabilities are recorded when, in management’s judgment, a tax position does not meet the
more-likely-than-not threshold for recognition. For tax positions that meet the more-likely-than-not threshold, a tax liability
may be recorded depending on management’s assessment of how the tax position will ultimately be settled. In evaluating
issues raised in such audits and other uncertain tax positions, we provide reserves for exposures as appropriate.
Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment
tests. We adopted the provisions of Accounting Standards Codification (“ASC”), Intangibles-Goodwill and Other
(ASC Topic 350) Testing Goodwill for Impairment, which permits, but does not require, a company to qualitatively assess
indicators of a reporting unit’s fair value when it is unlikely that a reporting unit is impaired. If, after completing the
qualitative assessment, a company believes it is likely that a reporting unit is impaired, a discounted cash flow analysis is
prepared to estimate fair value. If the recorded values of these assets are not recoverable, based on either the assessment
screen or discounted cash flow analysis, management performs the next step, which compares the fair value of the
reporting unit to the recorded value of the tangible and intangible assets of the reporting units. Goodwill is considered
impaired if the fair value of the tangible and intangible assets exceeds the fair value of the reporting unit.
For 2012, we reviewed goodwill for impairment utilizing a discounted cash flow analysis. A fair-value-based test is applied
at the reporting unit level, which is generally at or one level below the operating segment level. The test compares the
fair value of our reporting units to the carrying value of those reporting units. This test requires significant assumptions,
estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. The fair value of
goodwill is determined using an estimate of future cash flows of the reporting unit and a risk-adjusted discount rate to
compute a net present value of future cash flows. Projected net sales, gross profit, selling and administrative expense,
capital expenditures, depreciation, amortization and working capital requirements are based on our internal projections.
Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit
directly resulting from the use of its assets in its operations. We also considered assumptions that market participants may
use. Both the estimates of the fair value of our reporting units and the allocation of the estimated fair value of the reporting
units are based on the best information available to us as of the date of the assessment.
An adjustment to goodwill will be recorded for any goodwill that is determined to be impaired. Impairment of goodwill
is measured as the excess of the carrying amount of goodwill over the fair values of recognized assets and liabilities of
the reporting unit. We perform impairment tests during the fourth quarter of each fiscal year unless events indicate an
interim test is required. The goodwill impairment test performed as of the first day of our fourth fiscal quarter resulted in
no impairment charges. Based on the results of our most recent impairment test, the fair value of a reporting unit exceeded
its carrying value by less than 20%. As of February 2, 2013, the goodwill allocated to this reporting unit was $39.6 million.
During 2012, we terminated the Etienne Aigner license agreement, due to a dispute with the licensor and recognized an
impairment charge of $5.8 million, to reduce the remaining unamortized value of the licensed trademark intangible asset to
zero. Other intangible assets are amortized over their useful lives and are reviewed for impairment if and when impairment
indicators are present. See Note 9 to the consolidated financial statements for additional information related to the
impairment of goodwill and intangible assets.
Self-Insurance
We are self-insured and/or retain high deductibles for a significant portion of our workers’ compensation, employment
practices, health, disability, cyber risk, general liability, automobile and property programs, among others. We purchase
varying levels of insurance for losses in excess of our deductibles or self-insured retentions for these categories of loss.
At February 2, 2013 and January 28, 2012, self-insurance reserves were $12.3 million and $11.5 million, respectively. We
utilize (i) estimates from third-party actuaries and claims adjusters, (ii) statistical analyses of historical data for our
industry and our Company and (iii) our own estimates to determine required self-insurance reserves. Our reserves and
assumptions are reviewed, monitored and adjusted when warranted by changing circumstances. Actual experience may
vary from estimates and result in adjustments to our self-insurance liabilities.
Store Closing and Impairment Charges
We regularly analyze the results of all of our stores and assess the viability of underperforming stores to determine whether
events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived
assets may not be recoverable. After allowing for an appropriate start-up period, unusual nonrecurring events or favorable
trends, we write down to fair value the fixed assets of stores indicated as impaired.
Litigation Contingencies
We are the defendant in several claims and lawsuits arising in the ordinary course of business. We do not believe any of
these ordinary- course-of-business proceedings will have a material adverse eect on our consolidated financial position
or results of operations. We accrue our best estimate of the cost of resolution of these claims. Legal defense costs of such
claims are recognized in the period in which we incur the costs. See Note 17 to the consolidated financial statements for a
further description of commitments and contingencies.