Pep Boys 2012 Annual Report Download - page 82

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended February 2, 2013, January 28, 2012 and January 29, 2011
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
to determine the amount of impairment loss, if any. The second step compares the implied fair value of
reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting
unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to the excess. The loss recognized cannot exceed the carrying amount of goodwill. The
implied fair value of goodwill is determined in the same manner that the amount of goodwill
recognized in a business combination is determined. The Company allocates the fair value of a
reporting unit to all of the assets and liabilities of that unit, including intangible assets. Any excess of
the value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair
value of goodwill. A deterioration of macroeconomic conditions may not only negatively impact the
estimated operating cash flows used in the Company’s cash flow models, but may also negatively impact
other assumptions used in the Company’s analyses, including, but not limited to, the estimated cost of
capital and/or discount rates. Additionally, in accordance with accounting guidance, the Company is
required to ensure that assumptions used to determine fair value in the analyses are consistent with the
assumptions a market participant would use. As a result, the cost of capital and/or discount rates used
may increase or decrease based on market conditions and trends, regardless of whether the Company’s
cost of capital has changed. Therefore the Company may recognize an impairment even though cash
flows are approximately the same or greater than forecasted amounts.
There were no impairments as a result of the Company’s annual tests in the fourth quarter of
fiscal year 2012, fiscal year 2011, and fiscal year 2010.
OTHER INTANGIBLE ASSETS For intangible assets with finite lives, the Company amortizes
their cost on a straight-line basis over their estimated useful lives.
LEASES The Company amortizes leasehold improvements over the lesser of the lease term or
the economic life of those assets. Generally, for stores the lease term is the base lease term and for
distribution centers the lease term includes the base lease term plus certain renewal option periods for
which renewal is reasonably assured and for which failure to exercise the renewal option would result
in an economic penalty to the Company. The calculation of straight-line rent expense is based on the
same lease term with consideration for step rent provisions, escalation clauses, rent holidays and other
lease concessions. The Company begins expensing rent upon completion of the Company’s due
diligence or when the Company has the right to use the property, whichever comes earlier.
SOFTWARE CAPITALIZATION The Company capitalizes certain direct development costs
associated with internal-use software, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects. These costs are amortized over a
period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred
during the preliminary project stage, as well as maintenance and training costs are expensed as
incurred.
TRADE PAYABLE PROGRAM LIABILITY The Company has a trade payable program which is
funded by various bank participants who have the ability, but not the obligation, to purchase account
receivables owed by the Company directly from its vendors. The Company, in turn, makes the regularly
scheduled full vendor payments to the bank participants.
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