Macy's 2008 Annual Report Download - page 31

Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has
diminished. Factors considered in the determination of permanent markdowns include current and anticipated
demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to
permanently mark down merchandise, the resulting gross profit reduction is recognized in the period the
markdown is recorded.
The Company receives certain allowances from various vendors in support of the merchandise it purchases
for resale. The Company receives certain allowances as reimbursement for markdowns taken and/or to support
the gross margins earned in connection with the sales of merchandise. These allowances are generally credited to
cost of sales at the time the merchandise is sold in accordance with Emerging Issues Task Force (“EITF”) Issue
No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor.” The Company also receives advertising allowances from more than 1,000 of its merchandise vendors
pursuant to cooperative advertising programs, with some vendors participating in multiple programs. These
allowances represent reimbursements by vendors of costs incurred by the Company to promote the vendors’
merchandise and are netted against advertising and promotional costs when the related costs are incurred in
accordance with EITF Issue No. 02-16. Advertising allowances in excess of costs incurred are recorded as a
reduction of merchandise costs. The arrangements pursuant to which the Company’s vendors provide allowances,
while binding, are generally informal in nature and one year or less in duration. The terms and conditions of
these arrangements vary significantly from vendor to vendor and are influenced by, among other things, the type
of merchandise to be supported. Although it is highly unlikely that there will be any significant reduction in
historical levels of vendor support, if such a reduction were to occur, the Company could experience higher costs
of sales and higher advertising expense, or reduce the amount of advertising that it uses, depending on the
specific vendors involved and market conditions existing at the time.
Physical inventories are generally taken within each merchandise department annually, and inventory records
are adjusted accordingly, resulting in the recording of actual shrinkage. While it is not possible to quantify the
impact from each cause of shrinkage, the Company has loss prevention programs and policies that are intended to
minimize shrinkage. Physical inventories are taken at all store locations for substantially all merchandise categories
approximately two weeks before the end of the fiscal year. Shrinkage is estimated as a percentage of sales at interim
periods and for this approximate two-week period, based on historical shrinkage rates.
Long-Lived Asset Impairment and Restructuring Charges
The carrying values of long-lived assets are periodically reviewed by the Company whenever events or
changes in circumstances indicate that a potential impairment has occurred. For long-lived assets held for use, a
potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of
the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly
resulting from the use of those assets in operations. When a potential impairment has occurred, an impairment
write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes
its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash
flows significantly differ in the future, the Company may be required to record asset impairment write-downs.
For long-lived assets held for disposal by sale, an impairment charge is recorded if the carrying amount of
the assets exceeds its fair value less costs to sell. Such valuations include estimations of fair values and
incremental direct costs to transact a sale. If the Company commits to a plan to dispose of a long-lived asset
before the end of its previously estimated useful life, estimated cash flows are revised accordingly and the
Company may be required to record an asset impairment write-down. Additionally, related liabilities arise such
as severance, contractual obligations and other accruals associated with store closings from decisions to dispose
of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each
restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the
amounts assumed in arriving at the asset impairment and restructuring charge recorded.
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