Macy's 2014 Annual Report Download - page 58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
F-11
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 markdown
merchandise, the resulting gross margin 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. 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 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.
Vendor Allowances
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 and, ultimately, through cost of sales when the merchandise is sold.
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.
Advertising
Department store non-direct response advertising and promotional costs are expensed either as incurred or the first
time the advertising occurs. Direct response advertising and promotional costs are deferred and expensed over the period
during which the sales are expected to occur, generally one to four months. Advertising and promotional costs and
cooperative advertising allowances were as follows:
2014 2013 2012
(millions)
Gross advertising and promotional costs ................................................. $ 1,602 $ 1,623 $ 1,554
Cooperative advertising allowances......................................................... 425 457 431
Advertising and promotional costs, net of
cooperative advertising allowances...................................................... $ 1,177 $ 1,166 $ 1,123
Net sales ................................................................................................... $ 28,105 $ 27,931 $ 27,686
Advertising and promotional costs, net of cooperative
advertising allowances, as a percent to net sales.................................. 4.2% 4.2% 4.1%
Property and Equipment
Depreciation of owned properties is provided primarily on a straight-line basis over the estimated asset lives, which
range from fifteen to fifty years for buildings and building equipment and three to fifteen years for fixtures and equipment.
Real estate taxes and interest on construction in progress and land under development are capitalized. Amounts capitalized
are amortized over the estimated lives of the related depreciable assets. The Company receives contributions from
developers and merchandise vendors to fund building improvement and the construction of vendor shops. Such
contributions are netted against the capital expenditures.
Buildings on leased land and leasehold improvements are amortized over the shorter of their economic lives or the
lease term, beginning on the date the asset is put into use.