Macy's 2014 Annual Report Download - page 33

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Critical Accounting Policies
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the last-in, first-out (LIFO) retail inventory
method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar
characteristics, and is stated at its current retail selling value. Inventory retail values are converted to a cost basis by
applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail
ratio for each merchandise department based on beginning inventory and the fiscal year purchase activity. At January 31,
2015 and February 1, 2014, merchandise inventories valued at LIFO, including adjustments as necessary to record
inventory at the lower of cost or market, approximated the cost of such inventories using the first-in, first-out (FIFO) retail
inventory method. The application of the LIFO retail inventory method did not result in the recognition of any LIFO
charges or credits affecting cost of sales for 2014, 2013 or 2012. The retail inventory method inherently requires
management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or
slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.
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.
Physical inventories are generally taken within each merchandise department annually, and inventory records are
adjusted accordingly, resulting in the recording of actual shrinkage. Physical inventories are taken at all store locations for
substantially all merchandise categories approximately three weeks before the end of the fiscal year. Shrinkage is estimated
as a percentage of sales at interim periods and for this approximate three-week period, based on historical shrinkage rates.
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, including the use of radio frequency devices and interim inventories
to keep the Company's merchandise files accurate.
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 recognized when earned in accordance
with ASC Subtopic 605-50, “Customer Payments and Incentives.” The Company also receives advertising allowances from
approximately 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 ASC Subtopic 605-50. 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. The Company does not anticipate that there will be any significant reduction in historical
levels of vendor support. However, 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.
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 the carrying value may not be recoverable, such as historical operating losses or plans to close
stores before the end of their previously estimated useful lives. Additionally, on an annual basis, the recoverability of the
carrying values of individual stores are evaluated. 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.