Dollar General 2009 Annual Report Download - page 63

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The goodwill impairment test is a two-step process that requires management to make judgments in
determining what assumptions to use in the calculation. The first step of the process consists of
estimating the fair value of our reporting unit based on valuation techniques (including a discounted
cash flow model using revenue and profit forecasts) and comparing that estimated fair value with the
recorded carrying value, which includes goodwill. If the estimated fair value is less than the carrying
value, a second step is performed to compute the amount of the impairment by determining an
‘‘implied fair value’’ of goodwill. The determination of the implied fair value of goodwill would require
us to allocate the estimated fair value of our reporting unit to its assets and liabilities. Any unallocated
fair value represents the implied fair value of goodwill, which would be compared to its corresponding
carrying value.
The impairment test for indefinite-lived intangible assets consists of a comparison of the fair value
of the intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible
asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
We performed our annual impairment tests of goodwill and indefinite-lived intangible assets during
the third quarter of 2009 based on conditions as of the end of our second quarter. The tests indicated
that no impairment charge was necessary. We are not currently projecting a decline in cash flows that
could be expected to have an adverse effect such as a violation of debt covenants or future impairment
charges.
Property and Equipment. Property and equipment are recorded at cost. We group our assets into
relatively homogeneous classes and generally provide for depreciation on a straight-line basis over the
estimated average useful life of each asset class, except for leasehold improvements, which are
amortized over the lesser of the applicable lease term or the estimated useful life of the asset. Certain
store and warehouse fixtures, when fully depreciated, are removed from the cost and related
accumulated depreciation and amortization accounts. The valuation and classification of these assets
and the assignment of depreciable lives involves significant judgments and the use of estimates, which
have been materially accurate in recent years.
Impairment of Long-lived Assets. We review the carrying value of all long-lived assets for
impairment at least annually, and whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. In accordance with accounting standards for
impairment or disposal of long-lived assets, we review for impairment stores open for approximately
two years or more for which recent cash flows from operations are negative. Impairment results when
the carrying value of the assets exceeds the estimated undiscounted future cash flows over the life of
the lease. Our estimate of undiscounted future cash flows over the lease term is based upon historical
operations of the stores and estimates of future store profitability which encompasses many factors that
are subject to variability and are difficult to predict. If a long-lived asset is found to be impaired, the
amount recognized for impairment is equal to the difference between the carrying value and the asset’s
estimated fair value. The fair value is estimated based primarily upon projected future cash flows
(discounted at our credit adjusted risk-free rate) or other reasonable estimates of fair market value in
accordance with U.S. GAAP. During 2009, 2008 and the 2007 Predecessor period we recorded pre-tax
impairment charges of $5.0 million, $4.0 million and $0.2 million, respectively, for certain store assets
that we deemed to be impaired.
Insurance Liabilities. We retain a significant portion of the risk for our workers’ compensation,
employee health, property loss, automobile and general liability. These represent significant costs
primarily due to the large employee base and number of stores. Provisions are made to these liabilities
on an undiscounted basis based on actual claim data and estimates of incurred but not reported claims
developed using actuarial methodologies based on historical claim trends, which have been and are
anticipated to continue to be materially accurate. If future claim trends deviate from recent historical
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