Nordstrom 2014 Annual Report Download - page 44

Table of Contents
Nordstrom, Inc.
Notes to Consolidated Financial Statements
Dollar and share amounts in millions except per share, per option and per unit amounts
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Accounts Receivable
Accounts receivable includes credit card receivables from our Nordstrom private label and Visa credit cards, as well as credit and debit card
receivables due from third parties. We record credit card receivables on our Consolidated Balance Sheets at the outstanding balance, net of
an allowance for credit losses. The allowance for credit losses reflects our best estimate of the losses inherent in our credit card receivables
as of the balance sheet date, including uncollectible finance charges and fees. We estimate such credit losses based on several factors,
including historical aging and delinquency trends, write-off experience, portfolio concentration and risk metrics and general economic
conditions. For purposes of determining impairment and recording the associated allowance for credit losses, we evaluate our credit card
receivables on a collective basis as they are composed of large groups of smaller-balance homogeneous loans and, therefore, are not
individually evaluated for impairment. We record estimated uncollectible principal balances to bad debt expense while estimated uncollectible
finance charges and fees result in a reduction of credit card revenue. Credit card receivables constitute unsecured consumer loans, for which
the risk of cardholder default and associated credit losses tend to increase as general economic conditions deteriorate.
We consider a credit card account delinquent if the minimum payment is not received by the payment due date. Our aging method is based
on the number of completed billing cycles during which the customer has failed to make a minimum payment. Delinquent accounts, including
accrued finance charges and fees, are written off when they are determined to be uncollectible. During the third quarter of 2014, we modified
our write-off policy from 150 days past due to 180 days past due to better align with industry practice. Accounts are written off sooner in the
event of customer bankruptcy or other circumstances that make further collection unlikely.
Concurrent with our write-off policy change discussed above, we now recognize finance charges and fees on delinquent accounts until they
become 150 days past due, after which we place accounts on non-accrual status. Payments received for accounts on non-accrual status are
applied to accrued finance charges, fees and principal balances consistent with other accounts, with subsequent finance charge income
recognized only when actually received. Non-accrual accounts may return to accrual status when we receive three consecutive minimum
payments or the equivalent lump sum.
Our Nordstrom private label credit and debit cards can be used only at our Nordstrom full-line stores in the U.S., Nordstrom Rack stores and
online at Nordstrom.com, Nordstromrack.com and HauteLook, while our Nordstrom Visa credit cards also may be used for purchases outside
of Nordstrom. Cash flows from the use of both the private label and Nordstrom Visa credit cards for sales originating at our stores and our
website are treated as an operating activity within the Consolidated Statements of Cash Flows, as they relate to sales at Nordstrom. Cash
flows arising from the use of Nordstrom Visa credit cards outside of our stores are treated as an investing activity within the Consolidated
Statements of Cash Flows, as they represent loans made to our customers for purchases at third parties.
Merchandise Inventories
Merchandise inventories are generally stated at the lower of cost or market value using the retail inventory method (weighted-average cost).
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. The value of our inventory on the balance sheet is then reduced by a charge to cost of sales for
retail inventory markdowns taken on the selling floor. 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. We reserve for obsolescence based on
historical trends and specific identification.
Land, Property and Equipment
Land is recorded at historical cost, while property and equipment are recorded at cost less accumulated depreciation. Capitalized software
includes the costs of developing or obtaining internal-use software, including external direct costs of materials and services and internal
payroll costs related to the software project.
We capitalize interest on construction in progress and software projects during the period in which expenditures have been made, activities
are in progress to prepare the asset for its intended use and actual interest costs are being incurred.
Depreciation is computed using the straight-line method over the asset’s estimated useful life, which is determined by asset category as
follows:
Asset Life (in years)
Buildings and improvements 5 – 40
Store fixtures and equipment 3 – 15
Leasehold improvements 5 – 40
Capitalized software 3 – 7