GameStop 2011 Annual Report Download - page 47

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. Impairment losses recorded by the Company in fiscal 2011 were $11.2 million.
Impairment losses recorded in fiscal 2010 and fiscal 2009 were $1.5 million and $1.8 million, respectively.
Goodwill. Goodwill, aggregating $2,019.0 million, has been recorded as of January 28, 2012 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 as of 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 reporting unit’s goodwill exceeds the implied fair value, then an
impairment loss is recognized in the amount of the excess. If the carrying value of an individual indefinite-
lived intangible asset exceeds its fair value, such individual indefinite-lived intangible asset is written down
by the amount of the excess. The Company completed its annual impairment test of goodwill as of the first
day of the fourth quarter of fiscal 2009, fiscal 2010 and fiscal 2011 and concluded that none of its goodwill
was impaired. For the fiscal 2011 impairment test, for each of the reporting units, the calculated fair value
exceeded the carrying value by more than ten percent. For fiscal 2011, there was a $3.3 million goodwill
31