Sears 2013 Annual Report Download - page 70

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
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Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market. For Kmart and Sears Domestic, cost is
primarily determined using the retail inventory method (“RIM”). Kmart merchandise inventories are valued under
the RIM using primarily a first-in, first-out (“FIFO”) cost flow assumption. Sears Domestic merchandise inventories
are valued under the RIM using primarily a last-in, first-out (“LIFO”) cost flow assumption. For Sears Canada, cost
is determined using the average cost method based on individual items.
Inherent in the RIM calculation are certain significant management judgments and estimates including, among
others, merchandise markons, markups, markdowns and shrinkage, which significantly impact the ending inventory
valuation at cost, as well as resulting gross margins. The methodologies utilized by us in our application of the RIM
are consistent for all periods presented. Such methodologies include the development of the cost-to-retail ratios, the
groupings of homogenous classes of merchandise, the development of shrinkage and obsolescence reserves, the
accounting for price changes and the computations inherent in the LIFO adjustment (where applicable).
Management believes that the RIM provides an inventory valuation that reasonably approximates cost and results in
carrying inventory at the lower of cost or market.
Approximately 47% of consolidated merchandise inventories are valued using LIFO. To estimate the effects of
inflation on inventories, we utilize external price indices determined by an outside source, the Bureau of Labor
Statistics. If the FIFO method of inventory valuation had been used instead of the LIFO method, merchandise
inventories would have been $70 million higher at February 1, 2014 and $72 million higher at February 2, 2013.
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 recognized
and 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. Upfront 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.
Depreciation expense included within depreciation and amortization expense reported on the Consolidated
Statements of Operations was $703 million, $778 million, and $798 million for the years ended February 1, 2014,
February 2, 2013 and January 28, 2012, respectively.
Primarily as a result of store closing actions, certain property and equipment are considered held for sale. The
value of assets held for sale was $39 million and $57 million at February 1, 2014 and February 2, 2013, respectively.
These assets were included in prepaid expenses and other current assets in the Consolidated Balance Sheets at
February 1, 2014 and February 2, 2013 at the lower of their historical net book value or their estimated fair value,
less estimated costs to sell. We expect to sell the properties within a year and we continually remarket them.
Substantially all assets held for sale are held within the Sears Domestic segment.
Impairment of Long-Lived Assets and Costs Associated with Exit Activities
In accordance with accounting standards governing the impairment or disposal of long-lived assets, the
carrying value of long-lived assets, including property and equipment and definite-lived intangible assets, is