Pier 1 2008 Annual Report Download - page 41

The beneficial interest in the Master Trust was accounted for as an available-for-sale security and was
recorded at fair value. The Company estimated fair value of its beneficial interest in the Master Trust, both
upon initial securitization and thereafter, based on the present value of future expected cash flows using
management’s best estimates of key assumptions including credit losses and payment rates. See Note 11 of the
Notes to Consolidated Financial Statements for further discussion.
Inventories — The Company’s inventory is comprised of finished merchandise and is stated at the lower
of weighted average cost or market value. Cost is calculated based upon the actual landed cost of an item at
the time it is received in the Company’s warehouse using actual vendor invoices, the cost of warehousing and
transporting product to the stores and other direct costs associated with purchasing products.
The Company recognizes known inventory losses, shortages and damages when incurred and maintains a
reserve for estimated shrinkage since the last physical count, when actual shrinkage was recorded. The
reserves for estimated shrinkage at the end of fiscal years 2008 and 2007 were $3,756,000 and $6,193,000,
respectively.
In the fourth quarter of fiscal 2007, the Company made a strategic decision to liquidate certain inventory,
and completed its liquidation efforts by the end of the first quarter of fiscal 2008. In connection with this
decision, a $32,500,000 inventory write-down was recorded to state the excess inventory at the lower of
average cost or market. The write-down of inventory consisted primarily of previous merchandise assortments
the Company discontinued offering in its stores. This decision was made by the Company in order to clear
room in its stores to allow for new inventory to be displayed as it arrived throughout fiscal 2008.
Properties, maintenance and repairs — Buildings, equipment, furniture and fixtures, and leasehold
improvements are carried at cost less accumulated depreciation. Depreciation is computed using the straight-
line method over estimated remaining useful lives of the assets, generally thirty years for buildings and three
to ten years for equipment, furniture and fixtures. Depreciation of improvements to leased properties is based
upon the shorter of the remaining primary lease term or the estimated useful lives of such assets. Depreciation
related to the Company’s distribution centers is included in cost of sales. All other depreciation costs are
included in depreciation and amortization. Depreciation costs were $39,478,000, $49,984,000 and $54,870,000
in fiscal 2008, 2007 and 2006, respectively.
Expenditures for maintenance, repairs and renewals that do not materially prolong the original useful lives
of the assets are charged to expense as incurred. In the case of disposals, assets and the related depreciation
are removed from the accounts and the net amount, less proceeds from disposal, is credited or charged to
income.
Long-lived assets are reviewed for impairment at least annually and whenever an event or change in
circumstances indicates that its carrying value may not be recoverable. If the carrying value exceeds the sum
of the expected undiscounted cash flows, the assets are considered impaired. For store level long-lived assets,
expected cash flows are estimated based on management’s estimate of future sales, merchandise margin rates,
and expenses over the remaining expected terms of the leases. Impairment is measured as the amount by
which the carrying value of the asset exceeds the fair value of the asset. Fair value is determined by
discounting expected cash flows. Impairment, if any, is recorded in the period in which the impairment
occurred. Impairment charges were $4,838,000, $31,947,000 and $5,601,000 in fiscal 2008, 2007 and 2006,
respectively, and were included in selling, general and administrative expenses.
Goodwill and intangible assets — The Company applies the provisions of SFAS No. 142, “Goodwill and
Intangible Assets” (“SFAS No. 142”). Under SFAS No. 142, goodwill and intangible assets with indefinite
useful lives are not amortized, but instead are tested for impairment at least annually. In accordance with
SFAS No. 142, the Company’s reporting units were identified as components, and the goodwill assigned to
each represents the excess of the original purchase price over the fair value of the net identifiable assets
acquired for that component. The Company completed the annual impairment tests as of March 1, 2008 and
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Pier 1 Imports, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)