Famous Footwear 2013 Annual Report Download - page 38

36 2013 BROWN SHOE COMPANY, INC. FORM 10-K
We apply judgment in valuing our inventories by assessing the net realizable value of our inventories based on current
selling prices. At our Famous Footwear segment, we recognize markdowns when it becomes evident that inventory
items will be sold at retail prices less than cost, plus the cost to sell the product. This policy causes gross profit rate at
Famous Footwear to be lower than the initial markup during periods when permanent price reductions are taken to clear
product. At our other divisions, we generally provide markdown reserves to reduce the carrying values of inventories to
a level where, upon sale of the product, we will realize our normal gross profit rate. We believe these policies reflect the
dierence in operating models between Famous Footwear and our other segments. Famous Footwear periodically runs
promotional events to drive sales to clear seasonal inventories. The other segments rely on permanent price reductions to
clear slower-moving inventory.
We perform physical inventory counts or cycle counts on all merchandise inventory on hand throughout the year and
adjust the recorded balance to reflect the results. We record estimated shrinkage between physical inventory counts
based on historical results. Inventory shrinkage is included as a component of cost of goods sold.
Income Taxes
We record deferred taxes for the eects of timing dierences between financial and tax reporting. These dierences relate
principally to employee benefit plans, accrued expenses, bad debt reserves, depreciation and amortization, and inventory.
We evaluate our foreign investment opportunities and plans, as well as our foreign working capital needs, to determine
the level of investment required and, accordingly, determine the level of foreign earnings that we consider indefinitely
reinvested. Based upon that evaluation, earnings of our foreign subsidiaries that are not otherwise subject to United States
taxation, except for our Canadian subsidiary, are considered to be indefinitely reinvested, and accordingly, deferred taxes
have not been provided. If changes occur in future investment opportunities and plans, those changes will be reflected
when known and may result in providing residual United States deferred taxes on unremitted foreign earnings.
At February 1, 2014, we have net operating loss carryforwards at certain of our subsidiaries. We evaluate these
carryforwards for realization based upon their expiration dates and our expectations of future taxable income.
As deemed appropriate, valuation reserves are recorded to adjust the recorded value of these carryforwards to the
expected realizable value.
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 2013, 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