Nordstrom 2005 Annual Report Download - page 43

Nordstrom, Inc. and subsidiaries 35
Nordstrom, Inc.
Notes to Consolidated Financial Statements
Amounts in thousands except per share amounts
Land, Buildings and Equipment
Depreciation is computed using the straight-line method. Estimated useful lives by major asset category are as follows:
Asset Life (in years)
Buildings and improvements 5-40
Store fixtures and equipment 3-15
Leasehold improvements Shorter of life of lease or asset life
Software 3-7
Intangible Asset Impairment Testing
We review our goodwill and acquired tradename annually for impairment in the first quarter or when circumstances indicate the carrying value of
these assets may not be recoverable. The goodwill and acquired tradename associated with our Façonnable business are our largest impairment
risk. In 2005, we engaged an independent valuation specialist to estimate the reporting unit’s fair value.
Leases
We recognize lease expense on a straight-line basis over the minimum lease term. In 2004, we corrected our lease accounting policy to recognize
lease expense, net of landlord reimbursements, from the time that we control the leased property. In the past, we recorded net rent expense once
lease payments or retail operations started. We recorded a charge of $7,753 ($4,729 net of tax) in the fourth quarter of 2004 to correct this
accounting policy. The impact of this change was immaterial to prior periods.
We lease the land or the land and building at many of our Full-Line stores, and we lease the building at many of our Rack stores. Additionally, we
lease office facilities, warehouses and equipment. Most of these leases are classified as operating leases and they expire at various dates through
2080. We have no significant individual or master lease agreements.
Our fixed, noncancelable terms of the lease generally are 20 to 30 years for Full-Line stores and 10 to 15 years for Rack stores. Many of our leases
include options that allow us to extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception.
For leases that contain predetermined, fixed escalations of the minimum rentals, we recognize the rent expense on a straight-line basis and record
the difference between the rent expense and the rental amount payable under the leases in liabilities.
Most of our leases also provide for payment of operating expenses, such as common area charges, real estate taxes and other executory costs.
Some leases require additional payments based on sales and are recorded in rent expense when the contingent rent is probable.
Leasehold improvements made at the inception of the lease are amortized over the shorter of the asset life or the initial lease term as described
above. Leasehold improvements made during the lease term are also amortized over the shorter of the asset life or the remaining lease term.
We receive incentives to construct stores in certain developments. These incentives are recorded as a deferred credit and recognized as a reduction to
rent expense on a straight-line basis over the lease term as described above. At the end of 2005 and 2004, this deferred credit balance was $400,917 and
$392,807. Also, we may receive incentives based on a store’s net sales; we recognize these incentives in the year that they are earned as a reduction to
rent expense.
Foreign Currency Translation
The assets and liabilities of our foreign subsidiaries have been translated to U.S. dollars using the exchange rates effective on the balance sheet
date, while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustments are
recorded in accumulated other comprehensive earnings.
Income Taxes
We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on
differences between financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are calculated using the enacted
tax rates and laws that are expected to be in effect when the differences are expected to reverse. We establish valuation allowances for tax benefits
when we believe it is not likely that the related expense will be deductible for tax purposes.
Other Current Liabilities
Included in other current liabilities were gift card liabilities of $154,683 and $133,532 at the end of 2005 and 2004.