Nordstrom 2009 Annual Report Download - page 39

Nordstrom, Inc. and subsidiaries 31
Inventory
Our merchandise inventories are stated at the lower of cost or market value using the retail inventory method. Under the retail method, the valuation
of inventories and the resulting gross margins are determined by applying a calculated cost-to-retail ratio to the retail value of ending inventory. To
determine if the retail value of our inventory should be marked down, we consider current and anticipated demand, customer preferences, age of the
merchandise and fashion trends. Inherent in the retail inventory method are certain management judgments that may affect the ending inventory
valuation as well as gross margin. Among others, the significant estimates used in inventory valuation are obsolescence and shrinkage.
We reserve for obsolescence based on historical trends and specific identification. Shrinkage is estimated as a percentage of net sales for the period
from the most recent semi-annual inventory count based on historical shrinkage results. Therefore, our obsolescence reserve and shrinkage
percentage contain uncertainties as the calculations require management to make assumptions and to apply judgment regarding a number of factors,
including market conditions, the selling environment, historical results and current inventory trends.
We do not believe that the assumptions used in these estimates will change significantly based on prior experience. In the past three years, we have
made no material changes to our estimates included in the calculations of the obsolescence and shrinkage reserves. A 10% change in the obsolescence
reserve or our shrink percentage would not have a material effect on our net earnings.
Income Taxes
We calculate income taxes using the asset and liability approach. We recognize deferred tax assets and liabilities based on the difference between the
financial statement carrying amounts and respective tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the years in which we expect those temporary differences to reverse.
We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available
evidence, we determine that some portion of the tax benefit will not be realized. In the past three years we have not recorded any valuation allowance
related to our deferred tax assets.
In addition, we regularly evaluate the likelihood of realizing the benefit for income tax positions we have taken in various federal, state and foreign
filings by considering all relevant facts, circumstances and information available to us. If we believe it is more likely than not that our position will be
sustained, we recognize a benefit at the largest amount which we believe is cumulatively greater than 50% likely to be realized. Our unrecognized tax
benefit was $43 as of January 30, 2010 and $28 as of January 31, 2009.
Deferred tax asset valuation allowances and unrecognized tax benefits require significant management judgment regarding applicable statutes and
their related interpretation, the status of various income tax audits, and our particular facts and circumstances. Also, as audits are completed or
statutes of limitations lapse, it may be necessary to record adjustments to our taxes payable, deferred tax assets, tax reserves or income tax expense.
Such adjustments reduced our effective income tax rate by 1.8 percentage points in 2009 and 3.2 percentage points in 2008.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements. We do not expect any of these
pronouncements to have a material effect on our results of operations, liquidity or capital resources as they primarily address financial
statement disclosures.