GameStop 2009 Annual Report Download - page 43

from the sales of product replacement plans is recognized on a straight-line basis over the coverage period. Gift
cards sold to customers are recognized as a liability on the balance sheet until redeemed.
Stock-Based Compensation. The Company records share-based compensation expense in earnings
based on the grant-date fair value of options or restricted stock granted. As of January 30, 2010, the
unrecognized compensation expense related to the unvested portion of our stock options and restricted stock
was $13.3 million and $19.8 million, respectively, which is expected to be recognized over a weighted average
period of 1.6 and 1.7 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 30, 2010 have not been material.
Goodwill. Goodwill, aggregating $1,946.5 million, has been recorded as of January 30, 2010 related to
various acquisitions. Goodwill represents the excess purchase price over tangible net assets and identifiable
intangible assets acquired. The Company is required to evaluate goodwill and other intangible assets not
subject to amortization for impairment at least annually. This test is completed at the beginning of the fourth
quarter each fiscal year or when circumstances indicate the carrying value of the goodwill or other intangible
assets might be impaired. Goodwill has been assigned to reporting units for the purpose of impairment testing.
The Company has four business segments, the United States, Australia, Canada and Europe, which also define
our reporting units based upon the similar economic characteristics of operations within each segment,
including the nature of products, product distribution and the type of customer and separate management
within those regions. The Company estimates fair value based on the discounted cash flows of each reporting
unit. The Company uses a two-step process to measure goodwill impairment. If the fair value of the reporting
unit is higher than its carrying value, then goodwill is not impaired. If the carrying value of the reporting unit is
higher than the fair value, then the second test of goodwill impairment is needed. The second test compares the
implied fair value of the reporting unit’s goodwill with its carrying amount. If the carrying amount of the
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