Dick's Sporting Goods 2008 Annual Report Download - page 38

Critical Accounting Policies and Use of Estimates
The Company’s signifi cant accounting policies are described in Note 1 of the Consolidated Financial Statements, which were
prepared in accordance with accounting principles generally accepted in the United States of America. Critical accounting policies
are those that the Company believes are both most important to the portrayal of the Company’s fi nancial condition and results of
operations, and require the Company’s most diffi cult, subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those
policies may result in materially different amounts being reported under different conditions or using different assumptions.
The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing
its consolidated fi nancial statements.
Inventory Valuation The Company values inventory using the lower of weighted average cost or market method. Market price is
generally based on the current selling price of the merchandise. The Company regularly reviews inventories to determine if the
carrying value of the inventory exceeds market value and the Company records a reserve to reduce the carrying value to its market
price, as necessary. Historically, the Company has rarely experienced signifi cant occurrences of obsolescence or slow moving
inventory. However, future changes, such as customer merchandise preference, unseasonable weather patterns, economic
conditions or business trends could cause the Company’s inventory to be exposed to obsolescence or slow moving merchandise.
Shrink expense is accrued as a percentage of merchandise sales based on historical shrink trends. The Company performs physical
inventories at the stores and distribution centers throughout the year. The reserve for shrink represents an estimate for shrink for
each of the Company’s locations since the last physical inventory date through the reporting date. Estimates by location and in the
aggregate are impacted by internal and external factors and may vary signifi cantly from actual results.
Vendor Allowances Vendor allowances include allowances, rebates and cooperative advertising funds received from vendors.
These funds are determined for each fi scal year and the majority are based on various quantitative contract terms. Amounts expected
to be received from vendors relating to the purchase of merchandise inventories are treated as a reduction of inventory and reduce
cost of goods sold as the merchandise is sold. Amounts that represent a reimbursement of costs incurred, such as advertising,
are recorded as a reduction to the related expense in the period that the related expense is incurred. The Company records an
estimate of earned allowances based on the latest projected purchase volumes and advertising forecasts. On an annual basis at the
end of the year, the Company confi rms earned allowances with vendors to ensure the amounts are recorded in accordance with the
terms of the contract.
Business Combinations In accounting for business combinations, we allocate the purchase price of an acquired business to its
identifi able assets and liabilities based on estimated fair values and the excess of the purchase price over the amount allocated
to the assets and liabilities, if any, is recorded as goodwill. The determination of fair value involves the use of estimates and
assumptions which we believe provides a reasonable basis for determining fair value. Accordingly, we typically engage outside
appraisal fi rms to assist in the fair value determination of inventory, identifi able intangible assets such as trade names, and any
other signifi cant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the
acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed.
Goodwill and Intangible Assets Goodwill, indefi nite-lived and other fi nite-lived intangible assets are tested for impairment on an
annual basis. Additional impairment assessments may be performed on an interim basis if the Company deems it necessary.
Our evaluation for impairment requires accounting judgments and fi nancial estimates in determining the fair value of the reporting
unit. If these judgments or estimates change in the future, we may be required to record impairment charges for these assets.
The goodwill impairment test is a two-step impairment test. In the fi rst step, the Company compares the fair value of each reporting
unit to its carrying value. The Company determines the fair value of its reporting units using a combination of a discounted cash
fl ow and a market value approach. The Company’s estimates may differ from actual results due to, among other things, economic
conditions, changes to its business models, or changes in operating performance. Signifi cant differences between these estimates
and actual results could result in future impairment charges and could materially affect the Company’s future fi nancial results. If the
fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired
and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit
exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair
DICK’S SPORTING GOODS, INC. 2008 ANNUAL REPORT
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