Nordstrom 2011 Annual Report Download - page 35

Nordstrom, Inc. and subsidiaries 35
Revenue Recognition
We recognize revenue from sales at our retail stores at the point of sale, net of an allowance for estimated sales returns. Revenue from our sales to
customers shipped directly from our stores and our online and catalog sales includes shipping revenue, when applicable, and is recognized upon
estimated receipt by the customer. We estimate customer merchandise returns based on historical return patterns and reduce sales and cost of
sales accordingly.
Although we believe we have sufficient current and historical knowledge to record reasonable estimates of sales returns, there is a possibility that
actual returns could differ from recorded amounts. In the past three years, we have made no material changes to our estimates included in the
calculations of our sales return reserve. A 10% change in the sales return reserve would have had a $6 impact on our net earnings for the year
ended January 28, 2012.
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.
We reserve for obsolescence based on historical trends and specific identification. Our obsolescence reserve contains 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 reserve. A 10% change in the obsolescence reserve
would not have had a material effect on our net earnings for the year ended January 28, 2012.
Goodwill
We review our goodwill annually for impairment, or when circumstances indicate its carrying value may not be recoverable. We perform this
evaluation at the reporting unit level, comprised of the principal business units within our Retail segment. To assess the fair value of our HauteLook
goodwill, we utilize both an income approach and a market approach. To determine the fair value of goodwill related to nordstrom.com and Jeffrey,
we utilize a market approach. We compare the fair value of the reporting unit to its carrying value to determine if there is potential goodwill
impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value
of the goodwill within the reporting unit is less than the carrying value of the goodwill.
As part of our impairment testing, we utilize certain assumptions and apply judgment regarding a number of factors. Significant estimates in the
market approach include identifying similar companies and acquisitions with comparable business factors such as size, growth, profitability, risk and
return of investment and assessing comparable earnings or revenue multiples in estimating the fair value of the reporting unit. Assumptions in the
income approach include future cash flows for the business, future growth rates and discount rates. Estimates of cash flows may differ from actual
cash flows due to, among other things, economic conditions, changes to the business model or changes in operating performance. Based on the
results of our 2011 review, we recognized an impairment charge of $25 related to our HauteLook goodwill. We did not recognize an impairment loss
for goodwill in 2010. A 10% change in our fair value measurement for HauteLook goodwill would have impacted net earnings by approximately $15 for
the fiscal year ended January 28, 2012.
Income Taxes
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 $21 as of January 28, 2012 and $43 as of January 29, 2011.
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 did not materially
impact our effective income tax rate in 2011 or 2010.
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.