Foot Locker 2003 Annual Report Download - page 28

Critical Accounting Policies
Management’s responsibility for integrity and objectivity in the preparation and presentation of the Company’s
financial statements requires diligent application of appropriate accounting policies. Generally, the Company’s accounting
policies and methods are those specifically required by accounting principles generally accepted in the United States of
America (“GAAP”). Included in the “Summary of Significant Accounting Policies” footnote in Item 8. “Consolidated
Financial Statements and Supplementary Data” is a summary of the Company’s most significant accounting policies.
In some cases, management is required to calculate amounts based on estimates for matters that are inherently
uncertain. The Company believes the following to be the most critical of those accounting policies that necessitate
subjective judgments.
Merchandise Inventories
Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using the retail
inventory method. The retail inventory method (“RIM”) is commonly used by retail companies to value inventories at cost
and calculate gross margins by applying a cost-to-retail percentage to the retail value of inventories. The RIM is a system
of averages that requires management’s estimates and assumptions regarding markups, markdowns and shrink, among
others, and as such, could result in distortions of inventory amounts. Judgment is required to differentiate between
promotional and other markdowns that may be required to correctly reflect merchandise inventories at the lower of cost
or market. Management believes this method and its related assumptions, which have been consistently applied, to
be reasonable.
Vendor Allowances
In the normal course of business, the Company receives allowances from its vendors for markdowns previously taken.
Vendor allowances are recognized as a reduction in cost of sales in the period in which the markdowns are taken. The
Company has volume-related agreements with certain vendors, under which it receives rebates based on fixed percentages
of cost purchases. These volume-related rebates are recorded in cost of sales when the product is sold and they contributed
10 basis points to the 2003 gross margin rate.
The Company receives support from some of its vendors in the form of reimbursements for cooperative advertising
and catalog costs for the launch and promotion of certain products. The reimbursements are agreed upon with vendors
for specific advertising campaigns and catalogs. Such cooperative income, to the extent that it reimburses specific,
incremental and identifiable costs incurred to date, is recorded in SG&A in the same period as the associated expense
is incurred. Income received that is in excess of specific, incremental and identifiable costs incurred to date is recognized
as a reduction to the cost of merchandise as the merchandise is sold. Cooperative income amounted to approximately 24
percent of total advertising costs and approximately 8 percent of catalog costs in 2003.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, which the Company adopted in 2002, the Company recognizes an impairment loss
when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not
be recoverable. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises
measurable operating performance criteria as well as qualitative measures. If an analysis is necessitated by the occurrence
of a triggering event, the Company uses assumptions, which are predominately identified from the Company’s three-year
strategic plans, in determining the impairment amount. The calculation of fair value of long-lived assets is based on
estimated expected discounted future cash flows by store, which is generally measured by discounting the expected future
cash flows at the Company’s weighted-average cost of capital. Management believes its policy is reasonable and is
consistently applied. Future expected cash flows are based upon estimates that, if not achieved, may result in significantly
different results. Long-lived tangible assets and intangible assets with finite lives primarily include property and
equipment and intangible lease acquisition costs.
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