True Value 2008 Annual Report Download - page 37

notes to consolidated financial statements
16 :: T RUE VALUE COMPA NY
1. DESCRIPTION OF BUSINESS AND
ACCOUNTING POLICIES
Principal Business Activity
True Value Company (”True Value”) is a member-owned wholesaler
cooperative of hardware and related merchandise. True Value also
manufactures and sells paint and paint applicators. True Value’s
goods and services are sold predominately within the United
States, primarily to retailers of hardware, industrial distributors,
garden centers and rental retailers who have entered into retail
agreements with it. True Value also provides to its members value-
added services such as marketing, advertising, merchandising and
store location and design services. All members are considered
related parties; however, no one member significantly impacts
True Value’s financial statements.
Consolidation
The Consolidated Financial Statements include the accounts of
True Value and all wholly owned subsidiaries.
Reporting Year
True Value’s fiscal year ends the Saturday closest to December 31.
Fiscal year 2008 ended on January 3, 2009 and contained 53 weeks.
Fiscal years 2007 and 2006 ended on December 29, 2007 and
December 30, 2006, respectively, and contained 52 weeks.
Reclassifications
Certain reclassifications have been made to the prior years’ Con-
solidated Financial Statements and the notes thereto to conform
to the current year’s presentation. These reclassifications had no
effect on Net margin for any period or on Total members’ equity
at the balance sheet dates.
Cash Equivalents
True Value classifies all highly liquid investments with an original
maturity of three months or less as cash equivalents.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is determined principally
on the basis of past collection experience applied to ongoing
evaluations of True Value’s receivables and the risks of repayment
after applying set-off rights for any payment obligations owed by
True Value to the member. The allowance was $2,434 and $1,094
as of January 3, 2009 and December 29, 2007, respectively. True
Value considers accounts receivable past due if invoices remain
unpaid past their due date and writes off uncollectible receivables
after exhausting all collection efforts.
Inventories
Merchandise inventory is stated at the lower of cost, determined
on the first-in, first-out basis, or market value. Manufactured
inventory is stated at the lower of cost, determined on a stan-
dard cost method that approximates the first-in, first-out basis,
or market value. The lower of cost or market value considers the
estimated realizable value in the current economic environment
associated with disposing of surplus and/or damaged/obsolete
inventories. True Value’s ending 2008 inventory valuation reserve
of $17,652 increased by $3,034 from the ending 2007 reserve
of $14,618 mainly due to increased reserve on specific inven-
tory items and increased paint reserve. True Value calculated
the estimated realizable value based on an analysis of histori-
cal trends related to its distressed inventory. In its analysis, True
Value considers historical data on its ability to return inventory
to suppliers, to transfer inventory to other distribution centers,
to sell inventory to members through a price reduction process
and to sell remaining inventory to liquidators. The cost of inven-
tory also includes indirect costs (such as logistics, manufacturing,
freight-in and support costs) incurred to bring inventory to its
existing locations for resale and vendor rebates. These indirect
costs and vendor rebates are treated as net product costs, clas-
sified in inventory and subsequently recorded as cost of revenue
as the product is sold (see Note 2, ”Inventories”).
Interest-Free-Notes Receivables
True Value has a program to provide interest free loans to mem-
bers to open new stores or make store expansions. The loans
are for a period of ten years and are generally repaid through
the members’ non Class B common stock portion of the annual
patronage dividend. True Value discounts the loan amount using
market rates at the time of the loan. The difference between the
face value of the loan and the discounted amount is amortized
on a straight-line basis over the loan period. In addition, inter-
est income is imputed and recorded using the effective interest
method. At January 3, 2009 True Value had $4,555 in loans out-
standing discounted at an average interest rate of 8.19% and
$1,605 in unamortized discount remaining. At December 29, 2007
True Value had $2,128 in loans outstanding discounted at an aver-
age interest rate of 10.04% and $1,105 in unamortized discount
remaining. During 2008 and 2007, $179 and $76, respectively, of
discount was recognized as a reduction of revenue and $154 and
$64, respectively, in imputed interest income was recognized.
Properties
Properties are recorded at cost. Depreciation and amortization are
computed by using the straight-line method over the following
estimated useful lives: buildings and improvements – 10 to 40 years;
($ in thousands)