Petsmart 2010 Annual Report Download - page 59

presented, we estimate the inventory shrinkage based on a two-year historical trend analysis. Changes in shrink
results or market conditions could cause actual results to vary from estimates used to establish the reserves.
We have reserves for estimated obsolescence and to reduce inventory to the lower of cost or market. We
evaluate inventory for excess, obsolescence or other factors that may render inventories unmarketable at their
historical cost. If assumptions about future demand change or actual market conditions are less favorable than those
projected by management, we may require additional reserves.
As of January 30, 2011, and January 31, 2010, our inventory valuation reserves were $10.0 million and
$16.4 million, respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is
provided on buildings, furniture, fixtures and equipment and computer software using the straight-line method over
the estimated useful lives of the related assets. Leasehold improvements and capital lease assets are amortized using
the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets.
Computer software consists primarily of third-party software purchased for internal use. Costs associated with the
preliminary stage of a project are expensed as incurred. Once the project is in the development phase, external
consulting costs, as well as qualifying internal labor costs, are capitalized. Training costs, data conversion costs and
maintenance costs are expensed as incurred. Maintenance and repairs to furniture, fixtures and equipment are
expensed as incurred.
Long-lived assets are reviewed for impairment based on undiscounted cash flows. We conduct this review
quarterly and whenever events or changes in circumstances indicate that the carrying amount of such assets may not
be recoverable. If this review indicates that the carrying amount of the long-lived assets is not recoverable, we will
recognize an impairment loss, measured at fair value by estimated discounted cash flows or market appraisals.
There were no material asset impairments identified during 2010, 2009 or 2008.
Our property and equipment are depreciated using the following estimated useful lives:
Buildings ................................................ 39years or term of lease
Furniture, fixtures and equipment .............................. 2-12years
Leasehold improvements ..................................... 1-20years
Computer software ......................................... 3-7years
Goodwill
The carrying value of goodwill of $44.1 million and $42.2 million as of January 30, 2011, and January 31,
2010, respectively, represents the excess of the cost of acquired businesses over the fair market value of their net
assets. During 2010 and 2009, goodwill increased approximately $1.9 million and $3.6 million, respectively, as a
result of foreign currency translation. Other than the effects of foreign currency translation, there have been no other
changes to goodwill.
Insurance Liabilities and Reserves
We maintain workers’ compensation, general liability, product liability and property insurance, on all our
operations, properties and leasehold interests. We utilize high deductible plans for each of these areas including a
self insured health plan for our eligible associates. Workers’ compensation deductibles generally carry a
$1.0 million per occurrence risk of claim liability. Our general liability plan specifies a $0.5 million per occurrence
risk of claim liability. We establish reserves for claims under workers’ compensation and general liability plans
based on periodic actuarial estimates of the amount of loss for all pending claims, including estimates for which
claims have been incurred but not reported. Our loss estimates rely on actuarial observations of ultimate loss
F-9
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)