Pier 1 2009 Annual Report Download - page 42

experience from the results of its physical inventories. Inventory is physically counted at substantially all
locations at least once in each 12-month period, at which time actual results are reflected in the
financial statements. Physical counts were taken at substantially all stores and distribution centers
during each period presented in the financial statements. Although inventory shrinkage rates have not
fluctuated significantly in recent years, should actual rates differ from the Company’s estimates,
revisions to the inventory shrinkage expense may be required.
Impairment of long-lived assets—Long-lived assets such as buildings, equipment, furniture and
fixtures, and leasehold improvements are reviewed for impairment at least annually and whenever an
event or change in circumstances indicates that their carrying values 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 changes in sales, merchandise margins, 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. The Company recorded $9.4 million,
$4.8 million and $31.9 million in impairment charges in fiscal 2009, 2008 and 2007, respectively. As the
projection of future cash flows requires the use of judgment and estimates, if actual results differ from
the Company’s estimates, additional charges for asset impairments may be recorded in the future. If
management had lowered its assumptions of comparable store sales results by 3% for each of the next
five years, additional impairment charges of approximately $2.3 million would have been recorded in
fiscal 2009.
Insurance provision—The Company maintains insurance for workers’ compensation and general
liability claims with deductibles of $1,000,000 and $750,000, respectively, per claim. The liability
recorded for such claims is determined by estimating the total future claims cost for events that
occurred prior to the balance sheet date. The estimates consider historical claims development factors
as well as information obtained from and projections made by the Company’s insurance carrier and
underwriters. The recorded liabilities for workers’ compensation and general liability claims, including
those occurring in prior years but not yet settled, at February 28, 2009 were $19.7 million and
$8.3 million, respectively.
The assumptions made in determining the above estimates are reviewed monthly and the liability
adjusted accordingly as new facts are revealed. Changes in circumstances and conditions affecting the
assumptions used in determining the liabilities could cause actual results to differ from the Company’s
recorded amounts.
Defined benefit plans—The Company maintains supplemental retirement plans (the ‘‘Plans’’) for
certain of its current and former executive officers. The Plans provide that upon death, disability,
reaching retirement age or certain termination events, a participant will receive benefits based on
highest compensation, years of service and years of plan participation. These benefit costs are
dependent upon numerous factors, assumptions and estimates. Benefit costs may be significantly
affected by changes in key actuarial assumptions such as the discount rate, compensation rates, or
retirement dates used to determine the projected benefit obligation. Additionally, changes made to the
provisions of the Plans may impact current and future benefit costs.
Stock-based compensation—The fair value of stock options is amortized as compensation expense
over the vesting periods of the options. The fair values for options granted by the Company are
estimated as of the date of grant using the Black-Scholes option-pricing model. Option valuation
models require the input of highly subjective assumptions, including the expected stock price volatility
and the average life of options. The Company uses expected volatilities and risk-free interest rates that
correlate with the expected term of the option when estimating an option’s fair value. To determine the
expected term of the option, the Company bases its estimates on historical exercise activity of grants
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