Foot Locker 2005 Annual Report Download - page 48

Cost of sales is comprised of the cost of merchandise, occupancy, buyers’ compensation and shipping and handling
costs. The cost of merchandise is recorded net of amounts received from vendors for damaged product returns, markdown
allowances and volume rebates as well as cooperative advertising reimbursements received in excess of specific,
incremental advertising expenses. Occupancy reflects the amortization of amounts received from landlords for tenant
improvements.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and amortization. Significant additions
and improvements to property and equipment are capitalized. Maintenance and repairs are charged to current operations
as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and
depreciated. Owned property and equipment is depreciated on a straight-line basis over the estimated useful lives of the
assets: maximum of 50 years for buildings and 3 to 10 years for furniture, fixtures and equipment. Property and equipment
under capital leases and improvements to leased premises are generally amortized on a straight-line basis over the shorter
of the estimated useful life of the asset or the remaining lease term. Capitalized software reflects certain costs related
to software developed for internal use that are capitalized and amortized. After substantial completion of the project,
the costs are amortized on a straight-line basis overa2to7year period. Capitalized software, net of accumulated
amortization, is included in property and equipment and was $39 million at January 28, 2006 and $50 million at
January 29, 2005.
Recoverability of Long-Lived Assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”),
an impairment loss is recognized whenever events or changes in circumstances indicate that the carrying amounts of long-
lived tangible and intangible assets with finite lives may not be recoverable. Assets are grouped and evaluated at the
lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of
assets. The Company has identified this lowest level to be individual stores. The Company considers historical performance
and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset
with the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset
exceeds estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by
comparing the carrying amount of the asset with its estimated fair value. The estimation of fair value is generally measured
by discounting expected future cash flows at the Company’s weighted-average cost of capital. The Company estimates
fair value based on the best information available using estimates, judgments and projections as considered necessary.
Goodwill and Intangible Assets
The Company accounts for goodwill and other intangibles in accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets,” which requires that goodwill and intangible assets with indefinite lives be reviewed for impairment
if impairment indicators arise and, at a minimum, annually. The Company performs its annual impairment review as of
the beginning of each fiscal year. The fair value of each reporting unit evaluated as of the beginning of each year,
determined using a combination of market and discounted cash flow approaches, exceeded the carrying value of each
respective reporting unit. Separable intangible assets that are deemed to have finite lives will continue to be amortized
over their estimated useful lives. Intangible assets with finite lives primarily reflect lease acquisition costs and are
amortized over the lease term.
Derivative Financial Instruments
All derivative financial instruments are recorded in the Consolidated Balance Sheets at their fair values. Changes in
fair values of derivatives are recorded each period in earnings, other comprehensive gain or loss or as a basis adjustment
to the underlying hedged item, depending on whether a derivative is designated and effective as part of a hedge
transaction and, if it is, the type of hedge transaction. The effective portion of the gain or loss on the hedging derivative
instrument is reported as a component of other comprehensive income or as a basis adjustment to the underlying hedged
item and reclassified to earnings in the period in which the hedged item affects earnings. The effective portion of the
gain or loss on hedges of foreign net investments is generally not reclassified to earnings unless the net investment is
disposed of. To the extent derivatives do not qualify as hedges, or are ineffective, their changes in fair value are recorded
in earnings immediately, which may subject the Company to increased earnings volatility. The changes in the fair value
of the Company’s hedges of net investments in various foreign subsidiaries is computed using the spot method.
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to various market data and other valuation
techniques as appropriate. The carrying value of cash and cash equivalents, short-term investments and other current
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