TJ Maxx 2006 Annual Report Download - page 53

due in fiscal 2010, and $142.0 million for accrued rent, the cash flow requirements of which are included in the lease
commitments in the above table.
CRITICAL ACCOUNTING POLICIES
TJX must evaluate and select applicable accounting policies. We consider our most critical accounting policies,
involving management estimates and judgments, to be those relating to inventory valuation, retirement obligations,
casualty insurance, accounting for taxes, reserves for discontinued operations and loss contingencies. We believe that
we have selected the most appropriate assumptions in each of the following areas and that the results we would have
obtained, had alternative assumptions been selected, would not be materially different from the results we have
reported.
Inventory valuation: We use the retail method for valuing inventory on a first-in first-out basis. Under the retail
method, the cost value of inventory and gross margins are determined by calculating a cost-to-retail ratio and applying it
to the retail value of inventory. This method is widely used in the retail industry and involves management estimates
with regard to such things as markdowns and inventory shrinkage. A significant factor involves the recording and
timing of permanent markdowns. Under the retail method, permanent markdowns are reflected in the inventory
valuation when the price of an item is changed. We believe the retail method results in a more conservative inventory
valuation than other accounting methods. In addition, as a normal business practice, we have a specific policy as to
when markdowns are to be taken, greatly reducing the need for management estimates. Inventory shortage involves
estimating a shrinkage rate for interim periods, but is based on a full physical inventory at fiscal year end. Thus, the
difference between actual and estimated amounts may cause fluctuations in quarterly results, but is not a factor in full
year results. Overall, we believe that the retail method, coupled with our disciplined permanent markdown policy and a
full physical inventory taken at each fiscal year end, results in an inventory valuation that is fairly stated. Lastly, many
retailers have arrangements with vendors that provide for rebates and allowances under certain conditions, which
ultimately affect the value of the inventory. Our off-price businesses have historically not entered into such arrange-
ments with our vendors. Bob’s Stores, the value-oriented retailer we acquired in December 2003, does have vendor
relationships that provide for recovery of advertising dollars if certain conditions are met. These arrangements may have
some impact on Bob’s Stores’ inventory valuation but such amounts are immaterial to our consolidated results.
Retirement obligations: Retirement costs are accrued over the service life of an employee and represent in the
aggregate obligations that will ultimately be settled far in the future and are therefore subject to estimates. We are
required to make assumptions regarding variables, such as the discount rate for valuing pension obligations and the
long-term rate of return assumed to be earned on pension assets, both of which impact the net periodic pension cost for
the period. The discount rate, which we determine annually based on market interest rates, and our estimated long-
term rate of return, which can differ considerably from actual returns, are two factors that can have a considerable
impact on the annual cost of retirement benefits and the funded status of our qualified pension plan. We have made
contributions of $65 million, which exceeded the minimum required, over the last three years to largely restore the
funded status of our plan.
Casualty insurance: TJX’s casualty insurance program requires TJX to estimate the total claims it will incur as a
component of its annual insurance cost. The estimated claims are developed, with the assistance of an actuary, based on
historical experience and other factors. These estimates involve significant estimates and assumptions and actual results
could differ from these estimates. If TJX’s estimate for the claims component of its casualty insurance expense for fiscal
2007 were to change by 10%, the fiscal 2007 pre-tax cost would increase or decrease by approximately $5 million. A large
portion of these claims are funded with a non-refundable payment during the policy year, offsetting our estimated
claims accrual. The company has a net accrual of $31.4 million for the unfunded portion of its casualty insurance
program as of January 27, 2007.
Accounting for taxes: Like many large corporations, we are regularly under audit by the United States federal,
state, local or foreign tax authorities in the areas of income taxes and the remittance of sales and use taxes. In evaluating
the potential exposure associated with the various tax filing positions, we accrue charges for possible exposures. Based
on the annual evaluations of tax positions, we believe we have appropriately filed our tax returns and accrued for
possible exposures. To the extent we were to prevail in matters for which accruals have been established or be required
to pay amounts in excess of reserves, our effective income tax rate in a given financial period might be materially
impacted. The Internal Revenue Service has examined the fiscal years ended January 2000 through January 2003 and
several proposed adjustments are under appeal. We also have various state and foreign tax examinations in process.
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