Pier 1 2009 Annual Report Download - page 52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1—DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
its exposure associated with the repatriation of funds from its Canadian operations. At February 28,
2009 and March 1, 2008, there were no outstanding contracts to hedge exposure associated with the
Company’s merchandise purchases denominated in foreign currencies or the repatriation of Canadian
funds. For financial accounting purposes, the Company does not designate such contracts as hedges.
Thus, changes in the fair value of both types of forward contracts would be included in the Company’s
consolidated statements of operations. Both the changes in fair value and settlement of these contracts
are included in cost of sales for forwards related to merchandise purchases and in selling, general and
administrative expense for the contracts associated with the repatriation of Canadian funds.
When the Company enters into forward foreign currency exchange contracts, it enters into them
with major financial institutions and continually monitors its positions with, and the credit quality of,
these counterparties to such financial instruments.
Beneficial interest in securitized receivables—As of February 28, 2009 and March 1, 2008, the
Company had no beneficial interest since it allowed its securitization agreement to expire in fiscal 2007.
Prior to the expiration of this agreement, the Company securitized its entire portfolio of proprietary
credit card receivables, except an immaterial amount of those that failed certain eligibility
requirements, to a special-purpose wholly owned subsidiary, Funding, which transferred the receivables
to the Pier 1 Imports Credit Card Master Trust (the ‘‘Master Trust’’). Neither Funding nor the Master
Trust were consolidated by the Company, as the Master Trust met the requirements of a qualifying
special-purpose entity under Statement of Financial Accounting Standards (‘‘SFAS’’) No. 140,
‘‘Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.’’ The
Master Trust issued beneficial interests that represent undivided interests in the assets of the Master
Trust consisting of the transferred receivables and all cash flows from collections of such receivables.
The beneficial interests included certain interests retained by Funding, which were represented by
Class B Certificates, and the residual interest in the Master Trust (the excess of the principal amount of
receivables held in the Master Trust over the portion represented by the certificates sold to third-party
investors and the Class B Certificates). Gain or loss on the sale of receivables depended in part on the
previous carrying amount of the financial assets involved in the transfer, allocated between the assets
sold and the retained interests based on their relative fair value at the date of transfer.
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 9 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 merchandise to the stores and other direct costs associated with
purchasing merchandise.
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 2009 and 2008 were $6,582,000
and $3,756,000, respectively. The Company’s reserve for shrinkage as of fiscal 2009 year end increased
from 2008 as a result of a shift in the timing of physical inventory counts.
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