Staples 2015 Annual Report Download - page 127

APPENDIX C
STAPLES C-10
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Property and Equipment: Property and equipment are
recorded at cost. Expenditures for normal maintenance and
repairs are charged to expense as incurred. Depreciation
and amortization, which includes the amortization of assets
recorded under capital obligations, are provided using the
straight-line method over the following useful lives: 40 years for
buildings; 3-10 years for furniture and fixtures; and 3-10 years
for equipment, which includes computer equipment and
software with estimated useful lives of 3-7 years. Leasehold
improvements are amortized over the shorter of the terms of
the underlying leases or the estimated economic lives of the
improvements. Asset retirement obligations are recognized
when incurred and the related cost is amortized over the
remaining useful life of the related asset.
Lease Acquisition Costs: Lease acquisition costs, which are
included in other assets, are recorded at cost and amortized
using the straight-line method over the respective lease
terms, including option renewal periods if renewal of the
lease is reasonably assured, which range from 1 to 46 years.
Lease acquisition costs, net of accumulated amortization, at
January 30, 2016 and January 31, 2015 were $8 million and
$11 million, respectively.
Fair Value of Financial Instruments: The Company measures
the fair value of financial instruments pursuant to the guidelines
of Accounting Standards Codification (“ASC”) Topic 820 Fair
Value Measurement (“ASC Topic 820”), which establishes a
fair value hierarchy that prioritizes the inputs used to measure
fair value. The hierarchy gives the highest priority to quoted
prices in active markets for identical assets or liabilities (Level 1
measurement), then priority to quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active and model-
based valuation techniques for which all significant assumptions
are observable in the market (Level 2 measurement), then the
lowest priority to unobservable inputs (Level 3 measurement).
Impairment of Goodwill: The Company reviews goodwill
for impairment annually, in the fourth quarter, and whenever
events or changes in circumstances indicate that the carrying
value of a reporting unit might exceed its current fair value. For
the annual test, the Company may perform an initial qualitative
assessment for certain reporting units to determine whether it
is more likely than not that the fair value of the reporting unit
is less than its carrying amount. This assessment is used as
a basis for determining whether it is necessary to perform the
two step goodwill impairment test. For those reporting units for
which the Company performs the two step impairment test,
the Company determines fair value using discounted cash flow
analysis, which requires management to make assumptions
and estimates regarding industry economic factors and the
future profitability of the Company’s businesses. The Company
does not rely on a market approach given that it believes there
are an insufficient number of relevant guideline companies and
comparable transactions. It is the Company’s policy to allocate
goodwill and conduct impairment testing at a reporting unit
level based on its most current business plans, which reflect
changes the Company anticipates in the economy and the
industry. The Company established, and continues to evaluate,
its reporting units based on its internal reporting structure and
defines such reporting units at the operating segment level or
one level below.
Impairment of Long-Lived Assets: The Company evaluates
long-lived assets for impairment whenever events and
circumstances indicate that the carrying value of an asset may
not be recoverable. Recoverability is measured based upon the
estimated undiscounted cash flows expected to be generated
from the use of an asset plus any net proceeds expected to
be realized upon its eventual disposition. An impairment loss is
recognized if an asset’s carrying value is not recoverable and if
it exceeds its fair value. Staples’ policy is to evaluate long-lived
assets for impairment at the lowest level for which there are
identifiable cash flows that are largely independent of the cash
flows or other assets and liabilities.
Exit and Disposal Activities: The Company’s policy is to
recognize costs associated with exit and disposal activities,
including restructurings, when a liability has been incurred.
Employee termination costs associated with ongoing benefit
arrangements are accrued when the obligations are considered
probable and can be reasonably estimated, while costs
associated with one-time benefit arrangements generally are
accrued when the key terms of the arrangement have been
communicated to the affected employees. Costs related to
ongoing lease obligations for vacant facilities are recognized
once the Company has ceased using the facility, and the related
liability is recorded net of estimated future sublease income.
Payments made to terminate a lease agreement prior to the
end of its term are accrued when the termination agreement
is signed, or when notification is given to the landlord if a
lease agreement has a pre-existing termination clause. For
property and equipment that the Company expects to retire
at the time of a facility closing, the Company first reassesses
the assets’ estimated remaining useful lives and evaluates
whether the assets are impaired on a held for use basis, and
then accelerates depreciation as warranted.
Revenue Recognition: The Company recognizes revenue
from the sale of products and services when the following
four criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered,
the selling price is fixed or determinable, and collectibility is
reasonably assured. Revenue is recognized for product sales
at the point of sale for the Company’s retail operations and at
the time of shipment for its delivery sales. The Company offers
its customers various coupons, discounts and rebates, which
are treated as a reduction of revenue.
The Company evaluates whether it is appropriate to record
the gross amount of product and service sales and related
costs or the net amount earned as a commission. In making
this determination, the Company considers several factors,
including which party in the transaction is the primary obligor,
the degree of inventory risk, which party establishes pricing,
the Company’s ability to select vendors, and whether it earns
a fixed amount per transaction. Generally, when the Company
is the party in the transaction with the primary obligation to the
customer or is subject to inventory risk, revenue is recorded
at the gross sale price, assuming other factors corroborate
that the Company is the principal party in the transaction. If
the Company is not primarily obligated and does not have
inventory risk, it generally records the net amount as a
commission earned.