Pier 1 2007 Annual Report Download - page 44

a third-party investor and the Class B Certificates). Gain or loss on the sale of receivables depended in part on
the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold
and the retained interests based on their relative fair value at the date of transfer.
The beneficial interest in the Master Trust was accounted for as an available-for-sale security and was
recorded at fair value. The Company estimated fair value of its beneficial interest in the Master Trust, both
upon initial securitization and thereafter, based on the present value of future expected cash flows using
management’s best estimates of key assumptions including credit losses and payment rates. As of March 3,
2007, the Company had no beneficial interest since it had allowed its agreement to securitize its proprietary
credit card receivables to expire. As of February 25, 2006, the Company’s assumptions used to calculate the
present value of the future cash flows included estimated credit losses of 4.75% of the outstanding balance,
expected payment within a six-month period and a discount rate representing the average market rate the
Company would expect to pay if it sold securities representing ownership in the excess receivables not
required to collateralize the Class A Certificates. See Note 3 of the Notes to Consolidated Financial Statements
for further discussion.
Inventories — Inventories are comprised of finished merchandise and are stated at the lower of average
cost or market, cost being determined on a weighted average inventory method. Cost is calculated based upon
the actual landed cost of an item at the time it is received in the Company’s warehouse using actual vendor
invoices, the cost of warehousing and transporting product to the stores and other direct costs associated with
purchasing products.
In the fourth quarter of fiscal 2007, the Company made a strategic decision to sell off excess inventory
with the intention of completing its liquidation efforts by the end of the first quarter of fiscal 2008. In
connection with this decision, a $32,500,000 inventory write-down was recorded to state the excess inventory
at the lower of average cost or market. The write-down of inventory primarily consisted of previous
merchandise assortments the Company has discontinued offering in its stores. This decision was made by the
Company in order to clear room in its stores to allow for new inventory to be displayed as it arrives
throughout fiscal 2008.
The Company recognizes known inventory losses, shortages and damages when incurred and maintains a
reserve for estimated shrinkage since the last physical count, when actual shrinkage was recorded. The
reserves for estimated shrinkage at the end of fiscal years 2007 and 2006 were $6,193,000 and $8,218,000,
respectively.
Properties, maintenance and repairs — Buildings, equipment, furniture and fixtures, and leasehold
improvements are carried at cost less accumulated depreciation. Depreciation is computed using the straight-
line method over estimated remaining useful lives of the assets, generally thirty years for buildings and three
to ten years for equipment, furniture and fixtures. Depreciation of improvements to leased properties is based
upon the shorter of the remaining primary lease term or the estimated useful lives of such assets. Depreciation
related to the Company’s distribution centers is included in cost of sales. All other depreciation costs are
included in depreciation and amortization. Depreciation costs were $49,984,000, $54,870,000 and $54,404,000
in fiscal 2007, 2006 and 2005, respectively.
Expenditures for maintenance, repairs and renewals that do not materially prolong the original useful lives
of the assets are charged to expense as incurred. In the case of disposals, assets and the related depreciation
are removed from the accounts and the net amount, less proceeds from disposal, is credited or charged to
income.
Long-lived assets are reviewed for impairment at least annually and whenever an event or change in
circumstances indicates that its carrying value may not be recoverable. If the carrying value exceeds the sum
of the expected undiscounted cash flows, the assets are considered impaired. For store level long-lived assets,
expected cash flows are estimated based on management’s estimate of changes in sales, merchandise margins,
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Pier 1 Imports, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)