Home Depot 2008 Annual Report Download - page 28

Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk results primarily from fluctuations in interest rates. Although we have international operating
entities, our exposure to foreign currency rate fluctuations is not significant to our financial condition and results of
operations. Our primary objective for entering into derivative instruments is to manage our exposure to interest rates, as
well as to maintain an appropriate mix of fixed and variable rate debt.
As of February 1, 2009 we had, net of discounts, $11.0 billion of Senior Notes outstanding. The market values of the
publicly traded Senior Notes as of February 1, 2009, were approximately $10.0 billion.
Impact of Inflation, Deflation and Changing Prices
We have experienced inflation and deflation related to our purchase of certain commodity products. We do not believe
that changing prices for commodities have had a material effect on our Net Sales or results of operations. Although we
cannot precisely determine the overall effect of inflation and deflation on operations, we do not believe inflation and
deflation have had a material effect on our results of operations.
Critical Accounting Policies
Our significant accounting policies are disclosed in Note 1 to the Consolidated Financial Statements. The following
discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our
financial condition and results of operations and that require significant judgment or use of complex estimates.
Revenue Recognition
We recognize revenue, net of estimated returns and sales tax, at the time the customer takes possession of the
merchandise or receives services. We estimate the liability for sales returns based on our historical return levels. We
believe that our estimate for sales returns is an accurate reflection of future returns. We have never recorded a significant
adjustment to our estimated liability for sales returns. However, if these estimates are significantly below the actual
amounts, our sales could be adversely impacted. When we receive payment from customers before the customer has taken
possession of the merchandise or the service has been performed, the amount received is recorded as Deferred Revenue in
the accompanying Consolidated Balance Sheets until the sale or service is complete. We also record Deferred Revenue for
the sale of gift cards and recognize this revenue upon the redemption of gift cards in Net Sales.
Merchandise Inventories
Our Merchandise Inventories are stated at the lower of cost (first-in, first-out) or market, with approximately 82% valued
under the retail inventory method and the remainder under a cost method. Retailers like The Home Depot, with many
different types of merchandise at low unit cost and a large number of transactions, frequently use the retail inventory
method. Under the retail inventory method, Merchandise Inventories are stated at cost, which is determined by applying a
cost-to-retail ratio to the ending retail value of inventories. As our inventory retail value is adjusted regularly to reflect
market conditions, our inventory valued under the retail method approximates the lower of cost or market. We evaluate
our inventory valued under a cost method at the end of each quarter to ensure that it is carried at the lower of cost or
market. The valuation allowance for Merchandise Inventories valued under a cost method was not material to our
Consolidated Financial Statements as of the end of fiscal 2008 or 2007.
Independent physical inventory counts or cycle counts are taken on a regular basis in each store and distribution center to
ensure that amounts reflected in the accompanying Consolidated Financial Statements for Merchandise Inventories are
properly stated. During the period between physical inventory counts in our stores, we accrue for estimated losses related
to shrink on a store-by-store basis. Shrink (or in the case of excess inventory, “swell”) is the difference between the
recorded amount of inventory and the physical inventory. Shrink may occur due to theft, loss, inaccurate records for the
receipt of inventory or deterioration of goods, among other things. We estimate shrink as a percent of Net Sales using the
average shrink results from the previous two physical inventories. The estimates are evaluated quarterly and adjusted
based on recent shrink results and current trends in the business. Actual shrink results did not vary materially from
estimated amounts for fiscal 2008, 2007 or 2006.
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