Pep Boys 2007 Annual Report Download - page 75

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risk participation agreements and contingencies and litigation. Management bases its estimates and
judgments on historical experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe that the following represent our more critical estimates and assumptions used in the
preparation of the consolidated financial statements, although not all inclusive:
• We evaluate whether inventory is stated at the lower of cost or market based on historical
experience with the carrying value and life of inventory. The assumptions used in this evaluation
are based on current market conditions and we believe inventory is stated at the lower of cost as
determined under LIFO or market in the consolidated financial statements. In addition,
historically we have been able to return excess items to vendors for credit. Future changes in
vendors, in their policies or in their willingness to accept returns of excess inventory could
require a revision in the estimates. If our estimates regarding excess or obsolete inventory are
inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in
these estimates at February 2, 2008 would have affected net loss by approximately $618,000 for
the fiscal year ended February 2, 2008.
• We have risk participation arrangements with respect to casualty and health care insurance,
including the maintaining of stop loss coverage with third party insurers to limit our total
exposure. A reserve for the liabilities associated with these agreements is established using
actuarial methods followed in the insurance industry and our historical claims experience. The
amounts included in our costs related to these arrangements are estimated and can vary based
on changes in assumptions, claims experience or the providers included in the associated
insurance programs. A 10% change in our self-insurance liabilities at February 2, 2008 would
have affected net loss by approximately $4,816,000 for the fiscal year ended February 2, 2008.
• We record reserves for future product returns, warranty claims and inventory shrinkage. The
reserves are based on current sales of products and historical claims and inventory shrinkage
experience. If actual experience differs from historical levels, revisions in our estimates may be
required. A 10% change in these reserves at February 2, 2008 would have affected net loss by
approximately $620,000 for the fiscal year ended February 2, 2008.
• We have significant pension costs and liabilities that are developed from actuarial valuations.
Inherent in these valuations are key assumptions including discount rates, expected return on
plan assets, mortality rates and merit and promotion increases. We are required to consider
current market conditions, including changes in interest rates, in selecting these assumptions.
Changes in the related pension costs or liabilities may occur in the future due to changes in the
assumptions. The following table highlights the sensitivity of our pension obligations and expense
to changes in these assumptions, assuming all other assumptions remain constant:
Impact on Annual Impact on Projected
Change in Assumption Pension Expense Benefit Obligation
0.50 percentage point decrease in discount rate ......... Increase $425,000 Increase $3,520,000
0.50 percentage point increase in discount rate .......... Decrease $425,000 Decrease $3,520,000
5.0% decrease in expected rate of return on assets ....... Increase $186,000 —
5.0% increase in expected rate of return on assets ....... Decrease $186,000 —
• We periodically evaluate our long-lived assets for indicators of impairment. Management’s
judgments are based on market and operational conditions at the time of evaluation. Future
events could cause management’s conclusion on impairment to change, requiring an adjustment
of these assets to their then current fair market value.
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10-K