Petsmart 2006 Annual Report Download - page 67

for similar historical events, and changes in such assumptions could result in an adjustment to the reserves. As of
January 28, 2007 and January 29, 2006, the Company had approximately $67,937,000 and $54,246,000, respec-
tively, in reserves related to casualty, self-insured health plans, employer’s professional liability and workers’
compensation insurance policies.
Reserve for Closed Stores
The Company continuously evaluates the performance of its retail stores and periodically closes those that are
under-performing. Closed stores are generally replaced by a new store in a nearby location. The Company
establishes reserves for future occupancy payments on closed stores in the period the store closes in accordance with
SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal.” The costs for future occupancy payments
are reported in operating, general and administrative expenses in the Consolidated Statements of Operations and
Comprehensive Income. The Company calculates the cost for future occupancy payments, net of sublease income,
associated with closed stores using the net present value method, at a credit-adjusted risk-free interest rate, over the
remaining life of the lease. Judgment is used to estimate the underlying real estate market related to the expected
sublease income, and the Company can make no assurances that additional charges will not be required based on the
changing real estate environment.
Property and equipment retirement losses at closed stores are recorded as operating, general and administrative
expenses in the Consolidated Statements of Operations and Comprehensive Income.
Income Taxes
The Company establishes deferred income tax assets and liabilities for temporary differences between the
financial reporting bases and the income tax bases of assets and liabilities at enacted tax rates expected to be in
effect when such assets or liabilities are realized or settled. The Company records a valuation allowance on the
deferred income tax assets to reduce the total to an amount it believes is more likely than not to be realized.
Valuation allowances at January 28, 2007 and January 29, 2006 were principally to offset certain deferred income
tax assets for operating and capital loss carryforwards.
The Company accrues for potential income tax contingencies when it is probable that a liability to a taxing
authority has been incurred and the amount of the liability can be reasonably estimated, based on its view of the
likely outcomes of current and future audits. The Company adjusts its accrual for income tax contingencies for
changes in circumstances and additional uncertainties, such as amendments to existing tax law, both legislated and
concluded through the various jurisdictions’ tax court systems. If the amounts ultimately settled with tax authorities
are greater than the accrued contingencies, the Company must record additional income tax expense in the period in
which the assessment is determined. To the extent amounts are ultimately settled for less than the accrued
contingencies, or the Company determines that a liability to a taxing authority is no longer probable, the Company
reverses the contingency as a reduction of income tax expense in the period the determination is made.
The Company operates in multiple tax jurisdictions and could be subject to audit in any of these jurisdictions.
These audits can involve complex issues that may require an extended period of time to resolve and may cover
multiple years.
F-11
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)