True Value 2008 Annual Report Download - page 38

notes to consolidated financial statements
2008 FINAN CIA L REP OR T :: 17
machinery and warehouse equipment – 7 to 10 years; office and
computer equipment and software – 3 to 8 years; transportation
equipment – 3 to 12 years; and leasehold improvements – the
lesser of the life of the lease, without regard to options for renewal,
or the useful life of the underlying property.
Goodwill
Goodwill represents the excess of cost over the fair value of net
assets acquired. Goodwill is tested for impairment using the
income approach which utilizes a discounted future cash flow anal-
ysis for each reporting unit (Hardware and Paint manufacturing).
This test is completed annually unless significant events necessi-
tate a more frequent test. The test completed at January 3, 2009,
used a discount rate of 7% and assumed no revenue increases in
future years. Rates used to discount cash flows are dependent
upon True Value’s estimated cost of capital. A 100-basis-point
movement in the discount rate did not change the conclusion
of the analysis. In evaluating the recoverability of goodwill, man-
agement estimates each reporting unit’s fair value. In making this
estimate, True Value’s management relies on a number of fac-
tors including operating results, business plans and present value
techniques, to discount anticipated future cash flows. Future rev-
enue and other financial assumptions were developed giving
consideration to the current and expected economic environ-
ment. True Value completes its annual impairment assessment
at the end of each year and has determined that no impairment
existed at January 3, 2009 or December 29, 2007.
At January 3, 2009 and December 29, 2007, Goodwill was
comprised of $78,429 for the hardware segment and $13,045
for the paint manufacturing segment.
Revenue Recognition
True Value’s policy on items sold through its distribution network
is to recognize product revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or
determinable and collectibility is reasonably assured. Revenue
is not recognized until title and risk of loss have transferred to
the customer, which is upon delivery of products. Provisions for
discounts, rebates and other cash consideration given to cus-
tomers, and returns are provided for at the time the related sales
are recorded and are reflected as a reduction of sales. Certain
promoted items are sold with the right of return; True Value has
established a reserve in anticipation of these estimated returns.
Product revenue on items shipped directly to the member from
vendors is recognized at the time the vendors’ invoices are
received by True Value. Service revenue is comprised of advertis-
ing and markets, and transportation which amounted to $59,872
and $57,288 for 2008, respectively, $55,306 and $52,994 for 2007,
respectively, and $55,809 and $55,504 for 2006, respectively.
Amounts billed to members for advertising are included in net
revenue and recognized when the underlying advertisement is
run or when the related circulars are dropped. Amounts billed to
vendors for markets are included in net revenue and are recog-
nized in the months markets are held. Amounts billed to members
for shipping and handling costs are included in net revenue and
are recognized when the services are provided.
Advertising Expenses
Advertising costs are expensed in the period the advertising
takes place. Such costs amounted to $31,430, $26,750 and
$28,267 in 2008, 2007 and 2006, respectively, and are included
in Cost of revenue.
Repairs and Maintenance Expense
Expenditures which extend the useful lives of True Value’s property
and equipment are capitalized and depreciated on a straight-
line basis over the remaining useful lives of the underlying assets.
Otherwise, repair and maintenance expenditures are expensed
as incurred.
Research and Development Costs
Research and development costs related to True Value’s manufac-
turing operations are expensed as incurred. Such costs amounted
to $1,116, $1,103 and $1,046 in 2008, 2007 and 2006, respectively,
and are included in Logistics and manufacturing expenses.
Shipping and Handling Costs
Amounts incurred for shipping and handling are included in
Cost of revenue.
Income Taxes
Deferred tax assets and liabilities are determined based on cumu-
lative temporary differences between the amounts shown on the
financial statements and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse. At January 3, 2009, True Value concluded
that, based on the weight of available evidence, it is more likely
than not that the deferred tax assets will not be fully realized due
to True Value’s minimal taxable earnings after the distribution of
the patronage dividend to the members, and that a full valuation
allowance is required. Deferred tax assets will only be realized to
the extent net future earnings, after the distribution of the patron-
age dividend to the members, are retained and after accumulated
net operating losses are exhausted by True Value.
($ in thousands)