Foot Locker 2007 Annual Report Download - page 52

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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 over a 2 to 7 year period.
Capitalized software, net of accumulated amortization, is included in property and equipment and was $22 million at
February 2, 2008 and $29 million at February 3, 2007.
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. Management’s policy in determining
whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria at
the division level, as well as qualitative measures. The Company considers historical performance and future estimated
results, which are predominately identified from the Company’s three-year strategic plans, in its evaluation of potential
store-level 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 the 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 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 is determined using a combination of market and discounted cash flow approaches. During the
third and fourth quarters of 2007, the Company performed reviews of its U.S. Athletic stores’ goodwill, as a result of
the SFAS No. 144 recoverability analysis. These analyses did not result in an impairment charge. 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. The effective portion of the gain or loss on the hedging derivative instrument is reported as a
component of other comprehensive income/loss or as a basis adjustment to the underlying hedged item and reclassified
to earnings in the period in which the hedged item affects earnings.