Petsmart 2011 Annual Report Download - page 62

PetSmart, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements — (Continued)
claims have been incurred but not reported. Our loss estimates rely on actuarial observations of ultimate loss
experience for similar historical events and changes in such assumptions could result in an adjustment, favorable
or adverse, to our reserves. As of January 29, 2012, and January 30, 2011, we had approximately $102.8 million
and $99.9 million, respectively, in reserves related to workers’ compensation, general liability and self-insured
health plans, of which $71.1 million and $69.8 million were classified as other noncurrent liabilities in the Con-
solidated 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 pay-
ments are reported in operating, general and administrative expenses in the Consolidated Statements of Income
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 admin-
istrative expenses in the Consolidated Statements of Income 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 29, 2012, and January 30, 2011, were principally to offset certain deferred income tax assets for net
operating loss carryforwards. We generally do not materially adjust deferred income taxes at interim periods.
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, while 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.
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