Dick's Sporting Goods 2009 Annual Report Download - page 55

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 significant 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 significantly from actual results.
Vendor Allowances
Vendor allowances include allowances, rebates and cooperative advertising funds received from vendors. These funds are
determined for each fiscal 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 confirms 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 identifiable 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 firms to assist in
the fair value determination of inventory, identifiable intangible assets such as trade names, and any other significant assets or
liabilities.
Goodwill and Intangible Assets
Goodwill, indefinite-lived and other finite-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 financial 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 first 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 flow 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. Significant differences
between these estimates and actual results could result in future impairment charges and could materially affect the Company’s
future financial 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 value of the reporting unit’s goodwill and compare it to the carrying value of the
reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the
impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit’s goodwill based
upon the residual of the summed identified tangible and intangible assets and liabilities.
Intangible assets that have been determined to have indefinite lives are also not subject to amortization and are reviewed at least
annually for potential impairment, or more frequently as mentioned above. The fair value of the Company’s intangible assets are
estimated and compared to their carrying value. The Company estimates the fair value of these intangible assets based on an
income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would
be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a
Dick’s Sporting Goods, Inc. ¬2009 Annual Report 53