Macy's 2014 Annual Report Download - page 59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
F-12
The carrying value of long-lived assets is 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.
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.
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.