Dollar Tree 2010 Annual Report Download - page 37

Notes to Consolidated Financial Statements
impairment). The Company recorded an impairment
charge of $1.1 million in fi scal 2010 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 fl 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 consid-
ered 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 fi 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.
Pre-Opening Costs
The Company expenses pre-opening costs for new,
expanded and relocated stores, as incurred.
Advertising Costs
The Company expenses advertising costs as they are
incurred and they are included in “selling, general
and administrative expenses” on the accompanying
consolidated statements of operations. Advertising
costs approximated $11.1 million, $8.3 million and
$6.6 million for the years ended January 29, 2011,
January 30, 2010, and January 31, 2009, respectively.
Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable
to differences between fi nancial statement carrying
amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that
includes the enactment date of such change.
The Company includes interest and penalties in
the provision for income tax expense and income
taxes payable. The Company does not provide for any
penalties associated with tax contingencies unless they
are considered probable of assessment.
Stock-Based Compensation
The Company recognizes all share-based payments to
employees, including grants of employee stock options,
in the fi nancial statements based on their fair values.
Total stock-based compensation expense for 2010,
2009 and 2008 was $27.9 million, $21.7 million and
$16.7 million, respectively.
The Company recognizes expense related to the
fair value of stock options and restricted stock units
(RSUs) over the requisite service period on a straight-
line basis. The fair value of stock option grants is
estimated on the date of grant using the Black-Scholes
option pricing model. The fair value of the RSUs is
determined using the closing price of the Company’s
common stock on the date of grant.
Net Income Per Share
Basic net income per share has been computed by
dividing net income by the weighted average number
of shares outstanding. Diluted net income per share
refl ects the potential dilution that could occur
assuming the inclusion of dilutive potential shares
and has been computed by dividing net income by
the weighted average number of shares and dilutive
potential shares outstanding. Dilutive potential shares
include all outstanding stock options and unvested
restricted stock after applying the treasury stock method.
DOLLAR TREE, INC. ♦ 2010 Annual Report 35