Macy's 2012 Annual Report Download - page 59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
F-12
The Company classifies certain long-lived assets as held for disposal by sale and ceases depreciation when the particular
criteria for such classification are met, including the probable sale within one year. For long-lived assets to be disposed of by
sale, an impairment charge is recorded if the carrying amount of the asset exceeds its fair value less costs to sell. Such
valuations include estimations of fair values and incremental direct costs to transact a sale.
Leases
The Company recognizes operating lease minimum rentals on a straight-line basis over the lease term. Executory costs
such as real estate taxes and maintenance, and contingent rentals such as those based on a percentage of sales are recognized as
incurred.
The lease term, which includes all renewal periods that are considered to be reasonably assured, begins on the date the
Company has access to the leased property. The Company receives contributions from landlords to fund buildings and leasehold
improvements. Such contributions are recorded as deferred rent and amortized as reductions to lease expense over the lease
term.
Goodwill and Other Intangible Assets
The carrying value of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible
impairment in accordance with ASC Subtopic 350-20 “Goodwill.” Goodwill and other intangible assets with indefinite lives
have been assigned to reporting units for purposes of impairment testing. The reporting units are the Company’s retail operating
divisions. Goodwill and other intangible assets with indefinite lives are tested for impairment annually at the end of the fiscal
month of May. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a
reporting unit is less than its carrying value and whether it is necessary to perform the two-step goodwill impairment process.
If required, the first step involves a comparison of each reporting unit’s fair value to its carrying value and the Company
estimates fair value based on discounted cash flows. The reporting unit’s discounted cash flows require significant
management judgment with respect to sales, gross margin and SG&A rates, capital expenditures and the selection and use of an
appropriate discount rate. The projected sales, gross margin and SG&A expense rate assumptions and capital expenditures are
based on the Company’s annual business plan or other forecasted results. Discount rates reflect market-based estimates of the
risks associated with the projected cash flows directly resulting from the use of those assets in operations. The estimates of fair
value of reporting units are based on the best information available as of the date of the assessment. If the carrying value of a
reporting unit exceeds its estimated fair value in the first step, a second step is performed, in which the reporting unit’s goodwill
is written down to its implied fair value. The second step requires the Company to allocate the fair value of the reporting unit
derived in the first step to the fair value of the reporting unit’s net assets, with any fair value in excess of amounts allocated to
such net assets representing the implied fair value of goodwill for that reporting unit. If the carrying value of an individual
indefinite-lived intangible asset exceeds its fair value, such individual indefinite-lived intangible asset is written down by an
amount equal to such excess.
Capitalized Software
The Company capitalizes purchased and internally developed software and amortizes such costs to expense on a straight-
line basis over two to five years. Capitalized software is included in other assets on the Consolidated Balance Sheets.
Gift Cards
The Company only offers non-expiring gift cards to its customers. At the time gift cards are sold, no revenue is
recognized; rather, the Company records an accrued liability to customers. The liability is relieved and revenue is recognized
equal to the amount redeemed at the time gift cards are redeemed for merchandise. The Company records income from
unredeemed gift cards (breakage) as a reduction of SG&A expenses, and income is recorded in proportion and over the time
period gift cards are actually redeemed. At least three years of historical data, updated annually, is used to determine actual
redemption patterns.
Self-Insurance Reserves
The Company, through its insurance subsidiary, is self-insured for workers compensation and general liability claims up
to certain maximum liability amounts. Although the amounts accrued are actuarially determined based on analysis of historical
trends of losses, settlements, litigation costs and other factors, the amounts the Company will ultimately disburse could differ
from such accrued amounts.