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Table of Contents
Accounting policy Assumptions and uncertainties Quantification and analysis of effect on actual
results if estimates differ materially
Inventory valuation
. We value our
inventories at the lower of cost or market,
cost being determined on the first-in, first-
out method except in Europe and retail
locations where an average cost is used.
Excess and obsolete or unmarketable
merchandise are written down based on
historical experience, assumptions about
future product demand and market
conditions. If market conditions are less
favorable than projected or if technological
developments result in accelerated
obsolescence, additional write-downs may
be required. While obsolescence and
resultant markdowns have been within
expectations, there can be no guarantee that
we will continue to experience the same
level of markdowns we have in the past.
Our inventory reserve policy contains
assumptions and judgments made by
management related to inventory aging,
obsolescence, credits that we may obtain for
returned merchandise, shrink and consumer
demand.
We have not made any material changes to our
inventory reserve policy in the past three years
and we do not anticipate making any material
changes to this policy in the future. However if
our estimates are materially different than our
actual experience we could have a material loss
adjustment.
A change of 10% in our inventory reserves at
December 31, 2012 would impact net income by
approximately $1.0 million.
Goodwill and Intangible Assets. We apply
the provisions of relevant accounting
guidance in our valuation of goodwill,
trademarks, domain names, client lists and
other intangible assets. Relevant accounting
guidance requires that goodwill and
indefinite lived intangibles be reviewed at
least annually for impairment or more
frequently if indicators of impairment exist.
The amount of an impairment loss would be
recognized as the excess of the asset’s
carrying value over its fair value.
Our impairment testing involves judgments
and uncertainties, quantitative and
qualitative, related to the use of discounted
cash flow models and forecasts of future
results, both of which involve significant
judgment and may not be reliable.
Significant management judgment is
necessary to evaluate the operating
environment and economic conditions that
exist to develop a forecast for a reporting
unit. Assumptions related to the discounted
cash flow models we use include the inputs
used to determine the Company’s weighted
average cost of capital including a market
risk premium, the beta of a reporting unit,
reporting unit specific risk premiums and
terminal growth values. Critical
assumptions related to the forecast inputs
used in our discounted cash flow models
include projected sales growth, same store
sales growth, gross margin percentages, new
business opportunities, working capital
requirements, capital expenditures and
growth in selling, general and administrative
expense. We also use our company's market
capitalization and comparable company
market data to validate our reporting unit
valuations.
We have not made any material changes to our
goodwill policy in the past three years and we do
not anticipate making any material changes to
this policy in the future.
We recorded goodwill and intangible impairment
charges in 2012 (see below) and have
approximately $11.1 million in goodwill and
intangible assets at December 31, 2012.We do
not believe it is reasonably likely that the
estimates or assumptions used to determine
whether any of our remaining goodwill or
intangible assets are impaired will change
materially in the future. However if the inputs
used in our discounted cash flow models or our
forecasts are materially different than actual
experience we could incur impairment charges
that are material.
The Company conducted an evaluation of its
Technology Products multi-brand United States
consumer strategy and the intangible assets used
in that strategy and concluded that the
Company’s future North American consumer
business would be optimized by consolidating its
United States consumer operations under
TigerDirect, its leading and largest brand. As a
result an impairment charge of approximately
$35.3 million related to the trademarks, domain
names and goodwill of CompUSA and Circuit
City was taken in the fourth quarter of 2012.
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