Ace Hardware 2005 Annual Report Download - page 29

4ACE HARDWARE CORP. NEW FRONTIERS. NEW OPPORTUNITIES.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The Company and Its Business
Ace Hardware Corporation (the Company) operates as a
wholesaler of hardware and related products, and manufactures
paint products. As a retailer-owned cooperative, the Company
distributes substantially all of its patronage sourced earnings in
the form of patronage dividends to member retailers based on
their volume of merchandise purchases.
Consolidation
The accompanying consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries.
All significant intercompany transactions have been eliminated.
The equity method of accounting is used for 50% or less owned
affiliates over which the Company has the ability to exercise
significant influence.
Cash Equivalents and Investments
The Company considers all highly liquid instruments with an
original maturity of three months or less to be cash equivalents.
Short-term investments consist primarily of corporate and
government agency bonds and are classified as available for sale.
Receivables and Revenue Recognition
Receivables from retailers include amounts due from the sale of
merchandise and special equipment used in the operation of
retailers’ businesses. Other receivables are principally amounts
due from suppliers for promotional and advertising allowances.
The Company recognizes revenue when products are shipped and
the retailer takes ownership and assumes risk of loss, collection of
the resultant receivable is probable, persuasive evidence of an
arrangement exists and the sales price is fixed and determinable.
The Company records shipping and handling costs as sales and cost
of sales.
Notes Receivable
The Company has various lending programs to its retailers that
exceed one year. The notes bear interest at a market rate based
on the retailer’s credit quality and are recorded at face value.
Interest is recognized over the life of the note. During fiscal
2005, 2004 and 2003, $1.2 million, $1.1 million and $1.2 million,
respectively, were recorded as interest income related to the notes.
The notes are collateralized by the retailer’s stock and patronage
dividends payable. At December 31, 2005 and January 1, 2005,
the outstanding balance of the notes was $31.5 million and $27.1
million, respectively, of which the current portion of $13.4 million
and $4.8 million, respectively is recorded in current assets. At
December 31, 2005 and January 1, 2005, the Company evaluated
the collectibility of the notes and determined that an allowance
for doubtful accounts is not necessary. Payments on these notes are
primarily collected by the Company through the application of
patronage dividends or retailer billings.
Inventories
Inventories are valued at the lower of cost or net realizable value.
Cost is determined primarily using the last-in, first-out method for
all inventories other than paint, for which the first-in, first-out
method is used to determine cost.
In the first quarter of 2004, the Company applied EITF 02-16,
“Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor,” which resulted in a
change in the timing of recognizing vendor rebates from point
of product purchase to point of sale. The impact of applying
EITF 02-16 in fiscal 2004 resulted in a non-cash increase in cost
of sales of $11.6 million with a corresponding decrease in
inventory. The application of EITF 02-16 had no cash flow
impact on the Company.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Expenditures for maintenance,
repairs and renewals of relatively minor items are generally
charged to earnings. Significant improvements or renewals are
capitalized. Depreciation expense is computed on the straight-
line method based on estimated useful lives of 10 to 40 years for
buildings and improvements and 3 to 20 years for equipment.
Leasehold improvements are generally amortized on a straight-
line basis over the term of the respective lease.
Long-lived assets, such as property and equipment, are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized
in the amount by which the carrying amount of the asset exceeds
its fair value. Assets held for sale are separately presented in the
consolidated statements of financial position and reported at the
lower of the carrying amount or fair value less costs to sell, and are
no longer depreciated.
Financial Instruments
The carrying value of assets and liabilities that meet the
definition of a financial instrument included in the accompanying
Consolidated Statements of Financial Position approximate
fair value.
Retirement Plans
The Company has defined benefit retirement plans covering a
limited number of non-union employees. Costs with respect to
the noncontributory pension plans are determined actuarially
and consist of current costs and amounts to amortize prior service
costs and unrecognized gains and losses. The Company also
sponsors a defined contribution profit-sharing plan for substantially
all employees. The Company contribution under this plan is
determined annually by the Board of Directors and charged to
expense in the period it is earned by employees.
Income Taxes
The Company accounts for corporate income taxes under the
asset and liability method. Under this approach, deferred taxes are
recognized for the future tax consequences of differences between
the financial statement and income tax bases of existing assets and
liabilities, and measured based upon enacted tax laws and rates.