Pier 1 2009 Annual Report Download - page 53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1—DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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 in fiscal 2007 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 $30,556,000, $39,478,000 and $49,984,000 in fiscal 2009, 2008 and 2007, 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 $9,420,000, or $0.11 per share,
$4,838,000 or $0.05 per share, and $31,947,000, or $0.37 per share, in fiscal 2009, 2008 and 2007,
respectively, and were included in selling, general and administrative expenses. 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 $2,300,000 would have been recorded in
fiscal 2009.
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
test as of March 3, 2007. Fair value was determined through analyses of discounted future cash flows
for the applicable reporting units. The analysis resulted in a write-down of goodwill in fiscal 2007,
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