CompUSA 2014 Annual Report Download - page 28

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Table of Contents
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 certain locations 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, 2014 would impact net income
by approximately $0.8 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 assets
related to the June 2014 SCC acquisition of
approximately $2.7 million and in the fourth
quarter of 2014, we recorded intangible asset
impairment charges related to our retail
operations in the United States and Canada
(see below). We have approximately $7.4
million in goodwill and intangible assets at
December 31, 2014. 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.
As a result of negative cash flows in its
operations in the United States and Canada
and a forecast for continued cash use, the
Company conducted an evaluation of the
intangible assets of its Technology Products
segment in North America and concluded that
intangible assets were impaired and recorded
an impairment charge of $0.5 million, pre-
tax,
in the fourth quarter of 2014.
In 2013 we sold CompUSA intellectual
property assets and accordingly the Company
discontinued using the CompUSA brand in
Puerto Rico and rebranded its operations there
as TigerDirect. The Company wrote off the
remaining carrying value of approximately
$2.9 million, pre-
tax, related to the intangible
assets of the CompUSA brand in Puerto Rico.