Dillard's 2012 Annual Report Download - page 29

The Company estimates the required liability of such claims, utilizing an actuarial method, based upon
various assumptions, which include, but are not limited to, our historical loss experience, projected loss
development factors, actual payroll and other data. The required liability is also subject to adjustment
in the future based upon the changes in claims experience, including changes in the number of
incidents (frequency) and changes in the ultimate cost per incident (severity). As of February 2, 2013
and January 28, 2012, insurance accruals of $48.7 million and $50.3 million, respectively, were recorded
in trade accounts payable and accrued expenses and other liabilities. Adjustments resulting from
changes in historical loss trends have helped control expenses during fiscal 2012 and 2011, partially due
to Company programs that have helped decrease both the number and cost of claims. Further, we do
not anticipate any significant change in loss trends, settlements or other costs that would cause a
significant change in our earnings. A 10% change in our self-insurance reserve would have affected net
earnings by $3.2 million for fiscal 2012.
Long-lived assets. The Company’s judgment regarding the existence of impairment indicators is
based on market and operational performance. We assess the impairment of long-lived assets, primarily
fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment review include the
following:
• Significant changes in the manner of our use of assets or the strategy for the overall business;
• Significant negative industry or economic trends;
• A current-period operating or cash flow loss combined with a history of operating or cash flow
losses; or
• Store closings.
The Company performs an analysis of the anticipated undiscounted future net cash flows of the
related finite-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows,
the carrying value is reduced to its fair value. Various factors including future sales growth and profit
margins are included in this analysis. To the extent these future projections or the Company’s strategies
change, the conclusion regarding impairment may differ from the current estimates.
Income taxes. Temporary differences arising from differing treatment of income and expense
items for tax and financial reporting purposes result in deferred tax assets and liabilities that are
recorded on the balance sheet. These balances, as well as income tax expense, are determined through
management’s estimations, interpretation of tax law for multiple jurisdictions and tax planning. If the
Company’s actual results differ from estimated results due to changes in tax laws, changes in store
locations, settlements of tax audits or tax planning, the Company’s effective tax rate and tax balances
could be affected. As such, these estimates may require adjustment in the future as additional facts
become known or as circumstances change. Changes in the Company’s assumptions and judgments can
materially affect amounts recognized in the consolidated balance sheets and statements of income.
The total amount of unrecognized tax benefits as of February 2, 2013 and January 28, 2012 was
$5.4 million and $8.5 million, respectively, of which $3.9 million and $5.8 million, respectively, would, if
recognized, affect the effective tax rate. The Company classifies accrued interest expense and penalties
relating to income tax in the consolidated financial statements as income tax expense. The total interest
and penalties recognized in the consolidated statements of income during fiscal 2012, 2011 and 2010
was $(2.1) million, $(0.2) million, and $(2.3) million, respectively. The total accrued interest and
penalties in the consolidated balance sheets as of February 2, 2013 and January 28, 2012 was $1.4
million and $3.4 million, respectively.
The Company is currently under examination by various state and local taxing jurisdictions for
various fiscal years. The tax years that remain subject to examination for major tax jurisdictions are
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