Petsmart 2007 Annual Report Download - page 60

Computer software consists primarily of third-party software purchased for internal use. Costs associated with the
preliminary stage of a project are expensed as incurred. Once the project is in the development phase, external
consulting costs, as well as qualifying internal labor costs, are capitalized. Training costs, data conversion costs and
maintenance costs are expensed as incurred. Maintenance and repairs to furniture, fixtures and equipment are
expensed as incurred.
Long-lived assets are reviewed for impairment, based on undiscounted cash flows. We conduct this review
annually and whenever events or changes in circumstances indicate that the carrying amount of such assets may not
be recoverable. If this review indicates that the carrying amount of the long-lived assets is not recoverable, we will
recognize an impairment loss, measured by the future discounted cash flow method or market appraisals.
Our property and equipment is depreciated using the following estimated useful lives:
Buildings ................................................ 39years or term of lease
Furniture, fixtures and equipment .............................. 2 - 12years
Leasehold improvements ..................................... 1 - 20years
Computer software ......................................... 3 - 7years
Goodwill and Intangible Assets
We account for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets.” The carrying value of goodwill of $44.3 million and $14.4 million as of February 3, 2008 and as
of January 28, 2007, respectively, represents the excess of the cost of acquired businesses over the fair market value
of their net assets. In 2007, we purchased 19 store locations, which added 18 net new stores in Canada and increased
goodwill by $27.7 million. Since the acquisition, goodwill has increased approximately $2.2 million as a result of
foreign currency translation.
Intangible assets consisted primarily of servicemarks and trademarks that have an estimated useful life of 10 to
15 years. The servicemarks and trademarks have zero residual value. Amortization expense for the intangible assets
was $0.3 million, $0.3 million and $0.4 million during 2007, 2006 and 2005, respectively. For 2008 through 2012,
we estimate the amortization expense to be approximately $0.4 million each year.
Insurance Liabilities and Reserves
We maintain standard property and casualty insurance on all our properties and leasehold interests, product
liability insurance that covers products and the sale of pets, self-insured health plans, employer’s professional
liability and workers’ compensation insurance. Property insurance covers approximately $1.5 billion in buildings
and contents, including furniture and fixtures, leasehold improvements and inventory. Under our casualty and
workers’ compensation insurance policies as of February 3, 2008, we retained an initial risk of loss of $0.5 million
for general liability per occurrence and $0.75 million per occurrence for workers’ compensation. We establish
reserves for losses based on periodic actuarial estimates of the amount of loss inherent in that period’s claims,
including losses for which claims have been incurred but not reported. Loss estimates rely on actuarial observations
of ultimate loss experience for similar historical events, and changes in such assumptions could result in an
adjustment to the reserves. As of February 3, 2008, and January 28, 2007, we had approximately $86.7 million and
$67.9 million, respectively, in reserves related to casualty, self-insured health plans, employer’s professional
liability and workers’ compensation insurance policies.
Reserve for Closed Stores
We continuously evaluate the performance of our retail stores and periodically close those that are under-
performing. Closed stores are generally replaced by a new store in a nearby location. We establish reserves for
future occupancy payments on closed stores in the period the store closes in accordance with SFAS No. 146,
F-10
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)