GameStop 2014 Annual Report Download - page 52

Our senior management has discussed the development and selection of these critical accounting policies, as well as the significant
accounting policies disclosed in Note 1, "Nature of Operations and Summary of Significant Accounting Policies," to our
consolidated financial statements, with the Audit Committee of our Board of Directors. We believe the following accounting
policies are the most critical to aid in fully understanding and evaluating our reporting of transactions and events, and the estimates
these policies involve require our most difficult, subjective or complexjudgments.
Estimate Description Judgment and/or Uncertainty Potential Impact if Results Differ
Valuation of 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 existingcost
of product on-hand and this amount is
re-averaged over the cumulative units.
Pre-owned 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,weare required to
make assumptionsregarding the
necessity of reserves required to value
potentially obsolete or over-valued
items at the lower of cost or market. We
consider 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
dependentuponour ability to forecast
customer demand and to provide awell-
balanced merchandise assortment. Any
inability to forecast customer demand
properly couldleadtoincreased costs
associated with write-downs of inventory
to reflect volumes or pricing of inventory
which we believe represents the net
realizable value.
A10% change in our obsolescence
reserve percentage at January 31, 2015
would have affected net earnings by
approximately $3.1 million in fiscal 2014.
Cash Consideration Received from Vendors
We participate in cooperative
advertising programs and other vendor
marketing programs in which our
vendors provide us with cash
consideration in exchange for marketing
and advertising the vendors’ products.
The cooperative advertising programs
and other vendor marketing programs
generally cover aperiod from afew
weeks up to amonth andinclude items
such as product in-store display
promotions and placement, internet
advertising, co-op print advertisingand
other programs. The allowance for each
event is negotiated with the vendorand
requires specific performance by us to
be earned.
Our accounting for cooperative
advertising arrangements and other
vendor marketingprograms results in a
significantportion of the consideration
received from ourvendors reducing the
productcosts in inventory rather than as
an offset to our marketing and
advertising costs. The consideration
servingasareduction in inventory is
recognized in costofsales as inventory
is sold.
We estimate the amountofvendor
allowances to be deferred as areduction
of inventory based on the nature of the
consideration received and the
merchandise inventory to which the
consideration relates. We apply asell-
through rate to determine the timingin
which the consideration shouldbe
recognized incostofsales.
Consideration receivedthatrelates to
videogameproductsthathave not yet
been releasedtothe public isdeferred.
Although we consider our advertisingand
marketing programs to be effective, we
do notbelieve that we would be able to
incur the same level of advertising
expenditures ifthe vendorsdecreased or
discontinued their allowances.
Additionally,ifactual results are not
consistent with our estimated deferrals
and sell-through rates, we may be
exposed to additional adjustments that
could materially impact our gross profit
rates and inventory balances.
A10% difference in our vendor
allowances deferral at January 31, 2015
would haveaffected net earnings by
approximately $0.2million in fiscal 2014.
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