Dillard's 2009 Annual Report Download - page 23

Rentals. Rentals include expenses for store leases and data processing and other equipment
rentals.
Interest and debt expense, net. Interest and debt expense includes interest, net of interest
income, relating to the Company’s unsecured notes, mortgage notes, term note and subordinated
debentures, gains and losses on note repurchases, amortization of financing costs, call premiums and
interest on capital lease obligations.
Gain on disposal of assets. Gain on disposal of assets includes the net gain or loss on the sale or
disposal of property and equipment.
Asset impairment and store closing charges. Asset impairment and store closing charges consist
of write-downs to fair value of under-performing properties and exit costs associated with the closure of
certain stores. Exit costs include future rent, taxes and common area maintenance expenses from the
time the stores are closed.
Equity in (losses) earnings of joint ventures. Equity in (losses) earnings of joint ventures includes
the Company’s portion of the income or loss of the Company’s unconsolidated joint ventures, including
the equity in earnings of CDI prior to the purchase of its remaining interest and subsequent
consolidation on August 29, 2008.
Critical Accounting Policies and Estimates
The Company’s accounting policies are more fully described in Note 1 of Notes to Consolidated
Financial Statements. As disclosed in this note, the preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America (‘‘GAAP’’) requires
management to make estimates and assumptions about future events that affect the amounts reported
in the consolidated financial statements and accompanying notes. The Company evaluates its estimates
and judgments on an ongoing basis and predicates those estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under the circumstances.
Since future events and their effects cannot be determined with absolute certainty, actual results will
differ from those estimates.
Management of the Company believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in preparation of the Consolidated Financial
Statements.
Merchandise inventory. Approximately 97% of the inventories are valued at the lower of cost or
market using the last-in, first-out retail inventory method (‘‘LIFO RIM’’). Under LIFO RIM, the
valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated
cost to retail ratio to the retail value of inventories. LIFO RIM is an averaging method that is widely
used in the retail industry due to its practicality. Additionally, it is recognized that the use of
LIFO RIM will result in valuing inventories at the lower of cost or market if markdowns are currently
taken as a reduction of the retail value of inventories. Inherent in the LIFO RIM calculation are
certain significant management judgments including, among others, merchandise markon, markups, and
markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting
gross margins. Management believes that the Company’s LIFO RIM provides an inventory valuation
which results in a carrying value at the lower of cost or market. The remaining 3% of the inventories
are valued at the lower of cost or market using the average cost or specific identified cost methods. A
1% change in the dollar amount of markdowns would have impacted net income by approximately
$9 million for the year ended January 30, 2010.
The Company regularly records a provision for estimated shrinkage, thereby reducing the carrying
value of merchandise inventory. Complete physical inventories of all of the Company’s stores and
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