American Eagle Outfitters 2009 Annual Report Download - page 45

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Other-than-Temporary Impairment
The Company evaluates its investments for impairment in accordance with ASC 320. ASC 320 provides
guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary,
and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is
less than its cost. If, after consideration of all available evidence to evaluate the realizable value of its investment,
impairment is determined to be other-than-temporary, then an impairment loss is recognized in the Consolidated
Statement of Operations equal to the difference between the investment’s cost and its fair value. As of May 3, 2009,
the Company adopted ASC 320-10-65, Transition Related to FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary-Impairments (“ASC 320-10-65”), which modifies the requirements for
recognizing OTTI and changes the impairment model for debt securities. In addition, ASC 320-10-65 requires
additional disclosures relating to debt and equity securities both in the interim and annual periods as well as requires
the Company to present total OTTI in the Consolidated Statements of Operations, with an offsetting reduction for
any non-credit loss impairment amount recognized in other comprehensive income (“OCI”). During Fiscal 2009,
the Company recorded net impairment loss recognized in earnings related to credit losses on its investment
securities of $0.9 million. During Fiscal 2008, the Company recorded net impairment loss recognized in earnings of
$22.9 million in earnings related to certain investment securities.
Refer to Notes 3 and 4 to the Consolidated Financial Statements for additional information regarding net
impairment loss recognized in earnings.
Merchandise Inventory
Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average
cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise
receipts at the time merchandise is delivered to the foreign shipping port by the manufacturer (FOB port). This is the
point at which title and risk of loss transfer to the Company.
The Company reviews its inventory levels to identify slow-moving merchandise and generally uses mark-
downs to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned
permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer
demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of
fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed
price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of
inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count
and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by
changes in merchandise mix and changes in actual shrinkage trends.
Property and Equipment
Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line
method over the assets’ estimated useful lives. The useful lives of our major classes of assets are as follows:
Buildings ................................... 25years
Leasehold improvements ........................ Lesser of 10 years or the term of the lease
Fixtures and equipment ......................... 5years
In accordance with ASC 360, Property, Plant, and Equipment, the Company’s management evaluates the value
of leasehold improvements and store fixtures associated with retail stores, which have been open for a period of time
sufficient to reach maturity. The Company evaluates long-lived assets for impairment at the individual store level,
which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-
lived assets used in operations when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets.
44
AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)