GameStop 2008 Annual Report Download - page 43

period of 1.9 and 1.8 years, respectively. Note 1 of “Notes to Consolidated Financial Statements” provides
additional information on stock-based compensation.
Merchandise Inventories. Our merchandise inventories are carried at the lower of cost or market
generally using the average cost method. Under the average cost method, as new product is received from
vendors, its current cost is added to the existing cost of product on-hand and this amount is re-averaged over the
cumulative units. Used video game products traded in by customers are recorded as inventory at the amount of
the store credit given to the customer. In valuing inventory, management is required to make assumptions
regarding the necessity of reserves required to value potentially obsolete or over-valued items at the lower of
cost or market. Management considers quantities on hand, recent sales, potential price protections and returns
to vendors, among other factors, when making these assumptions. Our ability to gauge these factors is
dependent upon our ability to forecast customer demand and to provide a well-balanced merchandise
assortment. Any inability to forecast customer demand properly could lead to increased costs associated
with inventory markdowns. We also adjust inventory based on anticipated physical inventory losses or
shrinkage. Physical inventory counts are taken on a regular basis to ensure the reported inventory is accurate.
During interim periods, estimates of shrinkage are recorded based on historical losses in the context of current
period circumstances.
Property and Equipment. Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation on furniture, fixtures and equipment is computed using the straight-line method
over estimated useful lives (ranging from two to eight years). Maintenance and repairs are expensed as
incurred, while betterments and major remodeling costs are capitalized. Leasehold improvements are
capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective
leases, including renewal options in which the exercise of the option is reasonably assured (generally ranging
from three to ten years). Costs incurred to third parties in purchasing management information systems are
capitalized and included in property and equipment. These costs are amortized over their estimated useful lives
from the date the systems become operational. The Company periodically reviews its property and equipment
whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable or
their depreciation or amortization periods should be accelerated. The Company assesses recoverability based
on several factors, including management’s intention with respect to its stores and those stores’ projected
undiscounted cash flows. An impairment loss is recognized for the amount by which the carrying amount of
the assets exceeds their fair value, as approximated by the present value of their projected cash flows. Write-
downs incurred by the Company through January 31, 2009 have not been material.
Goodwill. Goodwill, aggregating $1,862.1 million, has been recorded as of January 31, 2009 related to
various acquisitions. Goodwill represents the excess purchase price over tangible net assets and identifiable
intangible assets acquired. The Company does not amortize goodwill, instead it evaluates it for impairment on
at least an annual basis. The Company completed its annual impairment test of goodwill as of the first day of
the fourth quarter of fiscal 2006, fiscal 2007 and fiscal 2008 and concluded that none of its goodwill was
impaired. Note 7 of “Notes to Consolidated Financial Statements” provides additional information concerning
goodwill.
Other Intangible Assets and Other Noncurrent Assets. Other intangible assets consist primarily of
tradenames, leasehold rights and amounts attributed to favorable leasehold interests recorded as a result of the
Micromania acquisition and the EB merger. Intangible assets are recorded consistent with the provisions of
Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS 141”), which requires
that intangible assets shall be recognized as an asset apart from goodwill if they arise from a contractual right
and are capable of being separated from the entity and sold, transferred, licensed, rented or exchanged
individually. The useful life and amortization methodology of intangible assets are based on the provisions of
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which requires
that the assets should be amortized over the period in which they are expected to contribute directly to cash
flows.
Tradenames which were recorded as a result of the Micromania acquisition are considered indefinite life
intangible assets as they are expected to contribute to cash flows indefinitely and are not subject to
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