Nordstrom 2015 Annual Report Download - page 33

Revenue Recognition
We recognize revenue net of estimated sales returns and excluding sales taxes. Revenue from sales to customers shipped directly from our
stores, website and catalog, which includes shipping revenue when applicable, 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, there were no significant changes in customer return behavior
and 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 $10 impact on our net earnings for the year ended January•30, 2016.
Inventory
Our merchandise inventories are generally stated at the lower of cost or market value using the retail inventory method. Under the retail
method, the valuation of inventories 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. Inherent in the retail inventory method are certain management judgments that may
affect the ending inventory valuation as well as gross profit.
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 have had a $2 impact on our net earnings for the year ended January•30, 2016.
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, through the application of a two-
step fair value test. The first step compares the carrying value of the reporting unit to its estimated fair value, which is based on the expected
present value of future cash flows (income approach), comparable public companies and acquisitions (market approach) or a combination of
both. If fair value is lower than the carrying value, then a second step is performed to quantify the amount of the impairment.
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. For Nordstrom.com, Jeffrey, Trunk Club and HauteLook, the fair values substantially exceeded
carrying values and therefore we had no material goodwill impairment in 2015, 2014 or 2013. A 10% change in the fair value of any of these
reporting units would not have had an impact on our net earnings for the year ended January•30, 2016.
Impairment of Long-Lived Assets
When facts and circumstances indicate that the carrying values of long-lived assets, including buildings, equipment and amortizable
intangible assets, may be impaired, we perform an evaluation of recoverability by comparing the carrying values of the net assets to their
related projected undiscounted future cash flows, in addition to other quantitative and qualitative analyses.
Land, property and equipment are grouped at the lowest level at which there are identifiable cash flows when assessing impairment. Cash
flows for our retail store assets are identified at the individual store level, while our intangible assets associated with HauteLook and Trunk
Club are identified at their respective reporting unit levels. The assets recorded in connection with the credit card receivable transaction are
individually evaluated against the anticipated cash flows under the program agreement (see Note 2: Credit Card Receivable Transaction in
Item 8).
Our estimates are subject to uncertainties and may be impacted by various external factors such as economic conditions and market
competition. While we believe the inputs and assumptions utilized in our analyses of future cash flows are reasonable, events or
circumstances may change which could cause us to revise these estimates.
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