Petsmart 2009 Annual Report Download - page 58

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 January 31,
2010, and February 1, 2009, we had approximately $95.4 million and $92.5 million, respectively, in reserves related
to casualty, self-insured health plans, employer’s professional liability, and workers’ compensation insurance
policies, of which $66.5 million and $63.2 million were classified as other noncurrent liabilities in the Consolidated
Balance Sheets.
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. The costs for future occupancy payments
are reported in operating, general and administrative expenses in the Consolidated Statements of Operations and
Comprehensive Income. We calculate the cost for future occupancy payments, net of expected sublease income,
associated with closed stores using the net present value method at a credit-adjusted risk-free interest rate over the
remaining life of the lease. Judgment is used to estimate the underlying real estate market related to the expected
sublease income, and we can make no assurances that additional charges will not be required based on the changing
real estate environment.
Property and equipment retirement losses at closed stores are recorded as operating, general and administrative
expenses in the Consolidated Statements of Operations and Comprehensive Income.
Income Taxes
We establish deferred income tax assets and liabilities for temporary differences between the financial
reporting bases and the income tax bases of our assets and liabilities at enacted tax rates expected to be in effect
when such assets or liabilities are realized or settled. We record a valuation allowance on the deferred income tax
assets to reduce the total to an amount we believe is more likely than not to be realized. Valuation allowances at
January 31, 2010, and February 1, 2009, were principally to offset certain deferred income tax assets for net
operating and capital loss carryforwards.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the
position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full
knowledge of all relevant information. Although we believe the estimates are reasonable, no assurance can be given
that the final outcome of these matters will not be different than what is reflected in the historical income tax
provisions and accruals.
We operate in multiple tax jurisdictions and could be subject to audit in any of these jurisdictions. These audits
can involve complex issues that may require an extended period of time to resolve and may cover multiple years. To
the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of
our reserves, our effective income tax rate in a given fiscal period could be materially affected. An unfavorable tax
settlement would require use of our cash and could result in an increase in our effective income tax rate in the period
of resolution. A favorable tax settlement could result in a reduction in our effective income tax rate in the period of
resolution.
Although we believe that the judgments and estimates discussed herein are reasonable, actual results could
differ, and we may be exposed to losses or gains that could be material.
F-10
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)