JCPenney 2002 Annual Report Download - page 28

2002 annual report J. C. Penney Company, Inc. 25
Notes to the Consolidated Financial Statements
2002, the internal cost inflation/deflation rates were used to cal-
culate the LIFO adjustment to ending inventory. The change
resulted in a LIFO provision for 2002 of $6 million versus a credit
of $17 million under the old method. For 2002, net income, basic
EPS and diluted EPS were lower by $14 million, $0.06 and $0.05,
respectively, as a result of this change. The cumulative effect of the
accounting change and pro forma amounts for periods prior to
2002 are not determinable because cost data is not available to
calculate internal indices for years prior to 2002.
In the Eckerd Drugstore segment, pharmaceutical and general
merchandise warehouse inventories are valued at the lower of
LIFO cost or market. General merchandise at retail drugstore
locations is valued using a modified retail method. Eckerd utilizes
internally developed price indices based on cost to estimate the
effects of inflation on inventories.
The total Company LIFO charges included in cost of sales were
$26 million, $38 million and $69 million in 2002, 2001 and 2000,
respectively. If the first-in, first-out or “FIFO” method of invento-
ry valuation had been used instead of the LIFO method, inven-
tories would have been $403 million and $377 million higher at
January 25, 2003 and January 26, 2002, respectively.
Property and Equipment
Property and equipment is stated at cost less accumulated
depreciation. Depreciation is provided principally by the straight-
line method over the estimated useful lives of the related assets,
generally three to 20 years for furniture and equipment and 50
years for buildings. Leasehold improvements are amortized over
the shorter of the estimated useful lives of the improvements or
the term of the lease.
Routine maintenance and repairs are expensed when incurred.
Major replacements and improvements are capitalized. The cost
of assets sold or retired and the related accumulated depreciation
or amortization are removed from the accounts, with any result-
ing gain or loss included in net income.
Capitalized Software Costs
Costs associated with the acquisition or development of soft-
ware for internal use are capitalized and amortized over the
expected useful life of the software, generally between three
and seven years.
Goodwill and Other Intangible Assets
Effective January 27, 2002, the Company adopted SFAS
No. 142, “Goodwill and Other Intangible Assets.” Upon adoption,
the Company ceased amortization of goodwill and other
indefinite-lived intangible assets, primarily the Eckerd trade name.
These assets are now subject to an impairment test on an annual
basis, or when there is reason to believe that their values have
been diminished or impaired. Additionally, a transitional impair-
ment test was required as of the adoption date. These impair-
ment tests were performed on each business of the Company
where goodwill is recorded. The net carrying value of goodwill and
the Eckerd trade name was $2,643 million as of January 26, 2002.
The Company completed the transitional impairment test on the
Eckerd trade name in the first quarter of 2002 and the transition-
al goodwill impairment test in the second quarter of 2002 and
determined that there was no evidence of impairment.
In the fourth quarter of 2002, the Company completed its
annual impairment analysis and determined that there was no evi-
dence of impairment. The fair value of the Company’s identified
reporting units was estimated using the expected present value of
corresponding future cash flows and market values of comparable
businesses where available. Other intangible assets with estimable
useful lives will continue to be amortized over those lives.
The following table sets forth the condensed consolidated pro
forma results of operations as if SFAS No. 142 had been in effect
for all years presented:
($ in millions, except EPS) 2002 2001 2000
Reported net income/(loss) $ 405 $ 98 $ (705)
Goodwill and trade name
amortization, net of tax —72 72
Adjusted net income/(loss) $ 405 $ 170 $ (633)
Basic EPS:
Reported net income/(loss) $ 1.41 $ 0.26 $ (2.81)
Goodwill and trade name
amortization, net of tax —0.27 0.27
Adjusted net income/(loss) $ 1.41 $ 0.53 $ (2.54)
Diluted EPS:
Reported net income/(loss) $ 1.37 $ 0.26 $ (2.81)
Goodwill and trade name
amortization, net of tax —0.27 0.27
Adjusted net income/(loss) $ 1.37 $ 0.53 $ (2.54)
Intangible assets consisted of the following:
($ in millions) 2002 2001
Amortizing intangible assets:
Prescription files $ 289 $ 258
Less accumulated amortization 157 121
Prescription files, net 132 137
Favorable lease rights 205 204
Less accumulated amortization 165 136
Favorable lease rights, net 40 68
Carrying amount of amortizing
intangible assets 172 205
Non-amortizing intangible assets
Eckerd trade name(1) 322 322
Total intangible assets $ 494 $ 527
(1) Eckerd trade name is net of accumulated amortization of $47 million for year-
end 2001.