Dollar Tree 2012 Annual Report Download - page 36

Notes to Consolidated Financial Statements
Financial Instruments
eCompanyutilizesderivativenancialinstruments
to reduce its exposure to market risks from changes
in interest rates and diesel fuel costs. By entering into
receive-variable,pay-xedinterestrateanddieselfuel
swaps, the Company limits its exposure to changes
in variable interest rates and diesel fuel prices. e
Company is exposed to credit-related losses in the event
of non-performance by the counterparty to these instru-
mentsbutminimizesthisriskbyenteringintotransac-
tions with high quality counterparties. Interest rate or
dieselfuelcostdierentialspaidorreceivedontheswaps
arerecognizedasadjustmentstointerestandfreight
expense, respectively, in the period earned or incurred.
e Company formally documents all hedging relation-
ships,ifapplicable,andassesseshedgeeectivenessboth
at inception and on an ongoing basis. e Company
entered into diesel fuel swaps that do not qualify for
hedge accounting. e fair values of these diesel fuel
swaps are recorded in the accompanying consolidated
balance sheets as a component of “other current assets”.
Fair Value Measurements
Fairvalueisdenedasanexitprice,representingthe
amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction 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 or liability. As a basis for considering
such assumptions, a fair value hierarchy has been
establishedthatprioritizestheinputsusedtomeasure
fair value. e 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).
e 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.
eCompany’scashandcashequivalents,restricted
investmentsanddieselfuelswapsrepresentthenancial
assets and liabilities that were accounted for at fair value
asofFebruary2,2013.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.eCompany’sassessmentof
thesignicanceofaparticularinputtothefairvalue
measurementrequiresjudgment,andmayaectthe
valuation of fair value assets and liabilities and their
placement within the fair value hierarchy levels. e fair
valueoftheCompany’scashandcashequivalentsand
restrictedinvestmentswas$399.9millionand$94.6
million,respectivelyatFebruary2,2013.esefair
values were determined using Level 1 measurements in
the fair value hierarchy. e fair value of the diesel fuel
swapswasanassetof$0.5millionasofFebruary2,
2013.efairvaluesoftheswapswereestimatedusing
Level2measurementsinthefairvaluehierarchy.ese
estimates used discounted cash flow calculations based
upon forward interest-rate yield and diesel cost curves.
e curves were obtained from independent pricing
services reflecting broker market quotes.
ecarryingvalueoftheCompany’sDemand
Revenue Bonds and Unsecured Credit Agreement long-
termdebtapproximatesitsfairvaluebecausethedebt’s
interest rate varies 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).eCompanyrecordedanimpairmentcharge
of$0.5millioninscal2012toreducecertainstore
assets to their estimated fair value. e fair values were
determined based on the income approach, in which the
Companyutilizedinternalcashowprojectionsoverthe
life of the underlying lease agreements discounted based
on a risk-free rate of return. ese measures of fair value,
andrelatedinputs,areconsideredalevel3approach
under the fair value hierarchy. ere were no other
changesrelatedtolevel3assets.
Lease Accounting
e Company leases most all of its retail locations under
operatingleases.eCompanyrecognizesminimumrent
expense starting when possession of the property is taken
from the landlord, which normally includes a construc-
tion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dierencebetween
therecognizedrentalexpenseandtheamountspayable
under the lease as deferred rent. e 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.
34 Dollar Tree, Inc.