Dollar Tree 2010 Annual Report Download - page 35

Notes to Consolidated Financial Statements
Merchandise Inventories
Merchandise inventories at the Company’s distribu-
tion centers are stated at the lower of cost or market,
determined on a weighted average cost basis. Cost is
assigned to store inventories using the retail inventory
method on a weighted-average basis. Under the retail
inventory method, the valuation of inventories at
cost and the resulting gross margins are computed by
applying a calculated cost-to-retail ratio to the retail
value of inventories. From our inception through fi scal
2009, the Company used one inventory pool for this
calculation. Because of investments over the years in
retail technology systems, the Company has been able
to refi ne the estimate of inventory cost under the retail
method. On January 31, 2010, the fi rst day of fi scal
2010, the Company began using approximately thirty
inventory pools in its retail inventory calculation.
As a result of this change, the Company recorded a
non-recurring, non-cash charge to gross profi t and
a corresponding reduction in inventory, at cost, of
approximately $26.3 million in the fi rst quarter of
2010. This was a prospective change and did not have
any effect on prior periods. This change in estimate
to include thirty inventory pools in the retail method
calculation is preferable to using one pool in the
calculation as it gives the Company a more accurate
estimate of cost of store level inventories.
Costs directly associated with warehousing and
distribution are capitalized as merchandise inventories.
Total warehousing and distribution costs capitalized into
inventory amounted to $30.8 million and $27.4 million
at January 29, 2011 and January 30, 2010, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and
depreciated using the straight-line method over the
estimated useful lives of the respective assets as follows:
Buildings 39 to 40 years
Furniture, fi xtures and equipment 3 to 15 years
Leasehold improvements and assets held under capital
leases are amortized over the estimated useful lives of the
respective assets or the committed terms of the related
leases, whichever is shorter. Amortization is included
in “selling, general and administrative expenses” in the
accompanying consolidated statements of operations.
Costs incurred related to software developed for
internal use are capitalized and amortized generally
over three years.
Goodwill
Goodwill is not amortized, but rather tested for
impairment at least annually. In addition, goodwill will
be tested on an interim basis if an event or circum-
stance indicates that it is more likely than not that an
impairment loss has been incurred. The Company
performed its annual impairment testing in November
2010 and determined that no impairment loss existed.
Other Assets, Net
Other assets, net consists primarily of restricted invest-
ments and intangible assets. Restricted investments were
$72.1 million and $78.4 million at January 29, 2011
and January 30, 2010, respectively and were purchased
to collateralize long-term insurance obligations.
These investments consist primarily of government-
sponsored municipal bonds, similar to the Company’s
short-term investments and money market securities.
These investments are classifi ed as available for sale
and are recorded at fair value, which approximates
cost. Intangible assets primarily include favorable lease
rights with fi nite useful lives and are amortized over
their respective estimated useful lives.
Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of
The Company reviews its long-lived assets and certain
identifi able intangible assets for impairment whenever
events or changes in circumstances indicate that the
carrying amount of an asset may not be recover-
able. Recoverability of assets to be held and used is
measured by comparing the carrying amount of an
asset to future net undiscounted cash fl ows expected to
be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized
is measured as the amount by which the carrying
amount of the assets exceeds the fair value of the
assets based on discounted cash fl ows or other readily
available evidence of fair value, if any. Assets to be
disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. In fi scal 2010,
2009 and 2008, the Company recorded charges of $1.1
million, $1.3 million and $1.2 million, respectively, to
write down certain assets. These charges are recorded
as a component of “selling, general and administrative
expenses” in the accompanying consolidated state-
ments of operations.
DOLLAR TREE, INC. ♦ 2010 Annual Report 33