Lululemon 2014 Annual Report Download - page 49

Table of Contents
and for raw materials, market is defined as replacement cost. Cost of inventories includes all costs incurred to deliver inventory to the Company's
distribution centers including freight, non-refundable taxes, duty and other landing costs.
The Company makes provisions as necessary to appropriately value obsolete or damaged goods. The amount of the provision is equal to
the difference between the cost of the inventory and its estimated net realizable value based upon assumptions about future demand, selling
prices and market conditions. In addition, the Company provides for inventory shrinkage based on historical trends from actual physical
inventory counts. Inventory shrinkage estimates are made to reduce the inventory value for lost or stolen items. The Company performs physical
inventory counts and cycle counts throughout the year and adjusts the shrink reserve accordingly.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation. Direct internal and external costs related to software used for
internal purposes which are incurred during the application development stage or for upgrades that add functionality are capitalized. All other
costs related to internal use software are expensed as incurred.
Depreciation commences when an asset is ready for its intended use. Buildings are depreciated on a straight-line basis over the expected
useful life of the asset, which is estimated to be 20 years. Leasehold improvements are depreciated on a straight-line basis over the lesser of the
length of the lease and the estimated useful life of the improvement, to a maximum of five years. All other property and equipment are
depreciated using the declining balance method as follows:
Goodwill and intangible assets
Intangible assets are recorded at cost. Reacquired franchise rights are amortized on a straight-line basis over their estimated useful lives of
10 years.
Goodwill represents the excess of the aggregate of the consideration transferred, the fair value of any non-controlling interest in the
acquiree, and the acquisition-
date fair value of the Company's previously held equity interest over the net assets acquired and liabilities assumed.
Goodwill and intangible assets with indefinite lives are tested annually for impairment or more frequently when an event or circumstance
indicates that goodwill or indefinite life intangible assets might be impaired. The Company's operating segment for goodwill is its corporate-
owned stores.
Impairment of long
-lived assets
Long-lived assets, including intangible assets with finite lives, held for use are evaluated for impairment when the occurrence of events or
a change in circumstances indicates that the carrying value of the assets may not be recoverable as measured by comparing their carrying value
to the estimated undiscounted future cash flows generated by their use and eventual disposition. Impaired assets are recorded at fair value,
determined principally by discounting the future cash flows expected from their use and eventual disposition. Reductions in asset values
resulting from impairment valuations are recognized in income in the period that the impairment is determined.
Leased property and equipment
The Company leases stores, distribution centers, and administrative offices. Minimum rental payments, including any fixed escalation of
rental payments and rent premiums, are amortized on a straight-
line basis over the life of the lease beginning on the possession date. Rental costs
incurred during a construction period, prior to store opening, are recognized as rental expense.
Deferred lease inducements, which include leasehold improvements paid for by the landlord and rent free periods, are recorded as
liabilities on the consolidated balance sheet and recognized as a reduction of rent expense on a straight-line basis over the term of the lease.
The difference between the recognized rental expense and the total rental payments paid is reflected on the consolidated balance sheet as a
deferred lease liability or a prepaid lease asset.
Contingent rental payments based on sales volumes are recorded in the period in which the sales occur.
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Furniture and fixtures
20
%
Computer hardware and software
30
%
Equipment and vehicles
30
%