Sears 2008 Annual Report Download - page 57

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Vendor Rebates and Allowances
We receive rebates and allowances from certain vendors through a variety of programs and arrangements
intended to offset our costs of promoting and selling certain vendor products. These vendor payments are
recorded as a reduction to the cost of merchandise inventories when earned and, thereafter, as a reduction of cost
of sales, buying and occupancy as the merchandise is sold. Up-front consideration received from vendors linked
to purchases or other commitments is initially deferred and amortized ratably to cost of sales, buying and
occupancy over the life of the contract or as performance of the activities specified by the vendor to earn the fee
is completed.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Additions and substantial
improvements are capitalized and include expenditures that materially extend the useful lives of existing
facilities and equipment. Maintenance and repairs that do not materially improve or extend the lives of the
respective assets are expensed as incurred.
Depreciation expense, which includes depreciation on assets under capital leases, is recorded over the
estimated useful lives of the respective assets using the straight-line method for financial statement purposes, and
accelerated methods for tax purposes. The range of lives are generally 20 to 50 years for buildings, 3 to 10 years
for furniture, fixtures and equipment, and 3 to 5 years for computer systems and computer equipment. Leasehold
improvements are depreciated over the shorter of the associated lease term or the estimated useful life of the
asset.
Impairment of Long-Lived Assets and Costs Associated with Exit Activities
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” the
carrying value of long-lived assets, including property and equipment, is evaluated whenever events or changes
in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Factors that
could result in an impairment review include, but are not limited to, a current period cash flow loss combined
with a history of cash flow losses or a projection that demonstrates continuing losses associated with the use of a
long-lived asset, significant changes in the manner of use of the assets or significant changes in business
strategies. An impairment loss is recognized when the estimated undiscounted cash flows expected to result from
the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying
value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its
estimated fair value as determined based on quoted market prices or through the use of other valuation
techniques. In addition to our on-going monitoring of potential impairment circumstances which may arise, we
perform an impairment analysis on our long-lived assets as of the last day of our November accounting period
each year. See Note 14 for further information regarding long-lived asset impairment charges recorded during
fiscal 2008.
We account for costs associated with location closings according to SFAS No. 146 “Accounting for Costs
Associated with Exit or Disposal Activities.” As such, we record a liability for costs associated with location
closings, which includes employee severance, inventory markdowns and other liquidation fees when
management makes the decision to exit a location. We record a liability for future lease costs (net of estimated
sublease income) when we cease to use the location.
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