Dollar Tree 2009 Annual Report Download - page 36

Notes to Consolidated Financial Statements
between market participants. As such, fair value is a
market-based measurement that should be determined
based on assumptions that market participants would
use in pricing an asset and liability. As a basis for
considering such assumptions, a fair value hierarchy
has฀been฀established฀that฀prioritizes฀the฀inputs฀used฀
to measure fair value. The hierarchy gives the highest
priority฀to฀unadjusted฀quoted฀prices฀in฀active฀markets฀
for identical assets or liabilities (level 1 measurement)
and the lowest priority to unobservable inputs (level
3 measurements). The three levels of the fair value
hierarchy are as follows:
Level฀1฀-฀ ฀Quoted฀prices฀in฀active฀markets฀for฀identical฀
assets or liabilities;
Level฀2฀-฀฀Quoted฀prices฀for฀similar฀instruments฀in฀
active markets; quoted prices for identical or
similar instruments in markets that are not
active; and
Level 3 - Unobservable inputs in which there is little or
no market data which require the reporting
entity to develop its own assumptions.
The฀Company’s฀cash฀and฀cash฀equivalents,฀short-
term investments, restricted investments and interest rate
and฀diesel฀fuel฀swaps฀represent฀the฀nancial฀assets฀and฀
liabilities that were accounted for at fair value on a recur-
ring฀basis฀as฀of฀January฀30,฀2010.฀As฀required,฀nancial฀
assets฀and฀liabilities฀are฀classied฀in฀their฀entirety฀based฀
on฀the฀lowest฀level฀of฀input฀that฀is฀signicant฀to฀the฀
fair฀value฀measurement.฀The฀Company’s฀assessment฀of฀
the฀signicance฀of฀a฀particular฀input฀to฀the฀fair฀value฀
measurement฀requires฀judgment,฀and฀may฀affect฀the฀
valuation of fair value assets and liabilities and their
placement within the fair value hierarchy levels. The fair
value฀of฀the฀Company’s฀cash฀and฀cash฀equivalents,฀short-
term฀investments฀and฀restricted฀investments฀was฀$571.6฀
million,฀$27.8฀million฀and฀$78.4฀million,฀respectively฀
at฀January฀30,฀2010.฀These฀fair฀values฀were฀determined฀
using Level 1 measurements in the fair value hierarchy.
The฀fair฀value฀of฀the฀swaps฀as฀of฀January฀30,฀2010฀was฀a฀
liability฀of฀$4.3฀million.฀These฀fair฀values฀were฀estimated฀
using฀Level฀2฀measurements฀in฀the฀fair฀value฀hierarchy.฀
These estimates used discounted cash flow calculations
based upon forward interest-rate yield and diesel cost
curves. The curves were obtained from independent
pricing services reflecting broker market quotes.
The฀carrying฀value฀of฀the฀Company’s฀long-term฀
debt฀approximates฀its฀fair฀value฀because฀the฀debt’s฀
interest rates vary with market interest rates.
Certain assets and liabilities are measured at fair
value on a nonrecurring basis; that is, the assets and
liabilities are not measured at fair value on an ongoing
basis฀but฀are฀subject฀to฀fair฀value฀adjustments฀in฀certain฀
circumstances (e.g., when there is evidence of impair-
ment). The Company recorded an impairment charge
of฀$1.3฀million฀in฀scal฀2009฀to฀reduce฀certain฀store฀
assets to their estimated fair value. The fair values
were determined based on the income approach, in
which฀the฀Company฀utilized฀internal฀cash฀ow฀projec-
tions over the life of the underlying lease agreements
discounted based on a risk-free rate of return. These
measures of fair value, and related inputs, are considered
a level 3 approach under the fair value hierarchy. There
were no other changes related to level 3 assets.
Lease Accounting
The Company leases all of its retail locations under
operating฀leases.฀The฀Company฀recognizes฀minimum฀
rent expense starting when possession of the property
is taken from the landlord, which normally includes
a฀construction฀period฀prior฀to฀store฀opening.฀When฀a฀
lease฀contains฀a฀predetermined฀xed฀escalation฀of฀the฀
minimum฀rent,฀the฀Company฀recognizes฀the฀related฀
rent expense on a straight-line basis and records the
difference฀between฀the฀recognized฀rental฀expense฀and฀
the amounts payable under the lease as deferred rent.
The Company also receives tenant allowances, which
are฀recorded฀in฀deferred฀rent฀and฀are฀amortized฀as฀a฀
reduction of rent expense over the term of the lease.
Revenue Recognition
The฀Company฀recognizes฀sales฀revenue฀at฀the฀time฀a฀
sale is made to its customer.
Taxes Collected
The Company reports taxes assessed by a governmental
authority that are directly imposed on revenue-
producing transactions (i.e., sales tax) on a net
(excluded from revenues) basis.
Cost of Sales
The Company includes the cost of merchandise, ware-
housing and distribution costs, and certain occupancy
costs in cost of sales.
34฀฀฀DOLLAR฀TREE,฀INC.฀•฀2009฀Annual฀Report