Saks Fifth Avenue 2010 Annual Report Download - page 60

SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
The Company receives allowances and expense reimbursements from merchandise vendors and from the
owner of the proprietary credit card portfolio which are netted against the related expense:
• Allowances received from merchandise vendors in conjunction with incentive compensation programs
for employees who sell the vendors’ merchandise and netted against the related compensation expense
were $36,098, $41,846, and $54,653 in 2010, 2009, and 2008, respectively.
• Allowances received from merchandise vendors in conjunction with jointly produced and distributed
print and television media and netted against the gross expenditures for such advertising were $29,323,
$33,287, and $45,813 in 2010, 2009, and 2008, respectively. Net advertising expenses were $45,465,
$36,025, and $39,358 in 2010, 2009, and 2008, respectively.
• Expense reimbursements received from the owner of the Company’s proprietary credit card portfolio
are discussed at Note 3 to these financial statements.
STORE PRE-OPENING COSTS
Store pre-opening costs primarily consist of rent expense incurred during the construction of new stores and
payroll and related media costs incurred in connection with new store openings and are expensed when incurred.
Rent expense is generally incurred for six to twelve months prior to a store’s opening date.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost less accumulated depreciation. For financial reporting
purposes, depreciation is computed principally using the straight-line method over the estimated useful lives of
the assets. Buildings and building improvements are depreciated over 20 to 40 years while fixtures and
equipment are primarily depreciated over 3 to 10 years. Leasehold improvements are amortized over the shorter
of their estimated useful lives or their related lease terms, generally ranging from 10 to 20 years. Terms of leases
used in the determination of estimated useful lives may include renewal periods at the Company’s option if
exercise of the option is determined to be reasonably assured at the inception of the lease. Costs incurred for the
development of internal computer software are capitalized and amortized using the straight-line method over 3 to
7 years. Costs incurred in the discovery and post-implementation stages of internally created computer software
are generally expensed as incurred.
Costs incurred when constructing stores, including interest expense, are capitalized. The Company may
receive allowances from landlords related to the construction. If the landlord is determined to be the primary
beneficiary of the property, then the portion of those allowances attributable to the property owned by the
landlord is considered to be a deferred rent liability, whereas the corresponding capital expenditures related to
that store are considered to be prepaid rent. Allowances in excess of the amounts attributable to the property
owned by the landlord are considered leasehold improvement allowances and are recorded as deferred rent
liabilities that are amortized over the life of the lease. Capital expenditures are reduced when the Company
receives cash and allowances from merchandise vendors to fund the construction of vendor shops.
Long-lived assets are evaluated for recoverability whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level of
identifiable cash flows, which is primarily at the individual store level.
A potential impairment has occurred if the estimated future undiscounted cash flows expected to result from
the use and eventual disposition of the store assets are less than the carrying value of those assets. When
estimating the cash flows associated with an individual store, management must make assumptions about key
store variables, including sales, gross margin and expenses, such as store payroll and occupancy costs.
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