Home Depot 2011 Annual Report Download - page 30

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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 significant assumptions or
complex estimates.
Revenues
We recognize revenue, net of estimated returns and sales tax, at the time the customer takes possession of 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 81% valued
under the retail inventory method and the remainder under a cost method. Retailers like us, 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 2011 or 2010.
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 2011, 2010 or 2009.
Self-Insurance
We are self-insured for certain losses related to general liability, workers’ compensation, medical, product liability and
automobile claims. Our liability represents an estimate of the ultimate cost for claims incurred as of the balance sheet date.
The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates, and
is reviewed by management and third-party actuaries on a regular basis to ensure that the liability is appropriate. While we
believe these estimates are reasonable based on the information currently available, if actual trends, including the severity or
frequency of claims, medical cost inflation or fluctuations in premiums, differ from our estimates, our results of operations
could be impacted. Actual results related to these types of claims did not vary materially from estimated amounts for fiscal
2011, 2010 or 2009.
Vendor Allowances
Vendor allowances primarily consist of volume rebates that are earned as a result of attaining certain purchase levels and
advertising co-op allowances for the promotion of vendors’ products that are typically based on guaranteed minimum
amounts with additional amounts being earned for attaining certain purchase levels. These vendor allowances are accrued as
earned, with those allowances received as a result of attaining certain purchase levels accrued over the incentive period based
on estimates of purchases. We believe that our estimate of vendor allowances earned based on expected volume of purchases
over the incentive period is an accurate reflection of the ultimate allowance to be received from our vendors.