Home Depot 2010 Annual Report Download - page 48

Inventory markdown costs reflected in Other are included in Cost of Sales in the accompanying Consolidated
Statements of Earnings, and costs related to asset impairments, lease obligations, severance and other
miscellaneous costs are included in SG&A expenses. Asset impairment charges, including contractual costs to
complete certain assets, were determined based on fair market value using market data for each individual
property. Lease obligation costs represent the present value of contractually obligated rental payments offset by
estimated sublet income, including estimates of the time required to sublease the locations. The payments related
to the leased locations therefore are not generally incremental uses of cash.
3. CHANGE IN ACCOUNTING PRINCIPLE
During fiscal 2008, the Company implemented a new enterprise resource planning (“ERP”) system, including a
new inventory system, for its retail operations in Canada. Along with this implementation, the Company changed
its method of accounting for Merchandise Inventories for its retail operations in Canada from the lower of cost
(first-in, first-out) or market, as determined by the retail inventory method, to the lower of cost or market using a
weighted-average cost method. As of the end of fiscal 2008, the implementation of the new inventory system and
related conversion to the weighted-average cost method for Canadian retail operations was complete.
The new ERP system allows the Company to utilize the weighted-average cost method, which the Company
believes will result in greater precision in the costing of inventories and a better matching of cost of sales with
revenue generated. The effect of the change on the Merchandise Inventories and Retained Earnings balances was
not material. Prior to the inventory system conversion, the Company could not determine the impact of the
change to the weighted-average cost method, and therefore, could not retroactively apply the change to periods
prior to fiscal 2008.
4. HD SUPPLY DISPOSITION
On August 30, 2007, the Company closed the sale of HD Supply, Inc. In accordance with FASB ASC 360-10, the
Company reclassified the results of HD Supply as discontinued operations in its Consolidated Statements of
Earnings for all periods presented. Settlement of working capital matters arising from the sale of HD Supply
resulted in earnings from discontinued operations of $41 million, net of tax, in fiscal 2009 and a loss from
discontinued operations of $52 million, net of tax, in fiscal 2008.
In connection with the sale, the Company purchased a 12.5% equity interest in the newly formed HD Supply for
$325 million. In fiscal 2008, the Company determined its 12.5% equity interest in HD Supply was impaired and
recorded a $163 million charge to write-down the investment. In fiscal 2009, the Company determined its equity
interest in HD Supply was further impaired and recorded an additional charge of $163 million to write-down the
remaining investment. These charges are included in Interest and Other, net, in the accompanying Consolidated
Statements of Earnings.
Also in connection with the sale, the Company guaranteed a $1.0 billion senior secured amortizing term loan of
HD Supply. The Company is responsible for up to $1.0 billion and any unpaid interest in the event of
nonpayment by HD Supply. As reported in the quarterly report on Form 10-Q of HD Supply for the period ended
October 31, 2010, the outstanding balance of this term loan as of October 31, 2010 was $940 million. The
guaranteed loan is collateralized by certain assets of HD Supply. The original expiration date of the guarantee
was August 30, 2012. On March 19, 2010, the Company amended the guarantee to extend the expiration date to
April 1, 2014. The fair value of the guarantee at August 30, 2007 was $16 million and was recorded as a liability
of the Company in Other Long-Term Liabilities. The extension of the guarantee increased the fair value of the
guarantee to $67 million, resulting in a $51 million charge to Interest and Other, net, for fiscal 2010.
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