Sally Beauty Supply 2011 Annual Report Download - page 110

Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2011, 2010 and 2009
such as freight from the distribution centers to the stores and handling costs incurred at the distribution
centers. When necessary, the Company adjusts the carrying value of inventory to the lower of cost or
market, including disposal costs, and for estimated inventory shrinkage. Estimates of the future demand
for the Company’s products, historical turn-over rates, the age and sales history of the inventory, and
historic as well as anticipated changes in stock keeping units (‘‘SKUs’’) are some of the key factors used by
management in assessing the net realizable value of inventory.
The Company estimates inventory shrinkage between physical counts based on its historical experience.
Physical inventory counts are performed at substantially all stores and significant distribution centers at
least annually, and sooner when management has reason to believe that the risk of inventory shrinkage at a
particular location is heightened. Upon completion of physical inventory counts, the Company’s
consolidated financial statements are adjusted to reflect actual quantities on hand. The Company has
policies and processes in place that are intended to minimize inventory shrinkage. Inventory shrinkage
expense has averaged approximately 1% of our consolidated net sales during each of the past three fiscal
years.
Lease Accounting
The Company’s lease agreements for office space, retail stores and warehouse/distribution facilities are
generally accounted for as operating leases, consistent with applicable GAAP. Rent expense (including any
rent abatements or escalation charges) is recognized on a straight-line basis from the date the Company
takes possession of the property to begin preparation of the site for occupancy, to the end of the lease
term, including renewal options determined to be reasonably assured. Certain lease agreements to which
the Company is a party provide for contingent rents that are determined as a percentage of revenues in
excess of specified levels. The Company records a contingent rent liability, along with the corresponding
rent expense, when specified levels have been achieved or when management determines that achieving
the specified levels during the fiscal year is probable.
Certain lease agreements to which the Company is a party provide for tenant improvement allowances.
Such allowances are recorded as deferred lease credits, included in accrued liabilities and other liabilities,
as appropriate, on our consolidated balance sheets, and amortized on a straight-line basis over the lease
term (including renewal options determined to be reasonably assured) as a reduction of rent expense. The
amortization period used for deferred lease credits is generally consistent with the amortization period
used for the constructed leasehold improvement asset for a given location.
Valuation of Long-Lived Assets and Intangible Assets with Definite Lives
Long-lived assets, such as property and equipment, including store equipment, and purchased intangibles
subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. The recoverability of long-lived assets
and intangible assets subject to amortization is assessed by comparing the net carrying amount of each
asset to its total estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the
asset. There were no significant impairment losses recognized in our financial statements in the current or
prior fiscal years presented.
Intangible assets subject to amortization include customer relationships, certain distribution rights and
non-competition agreements, and are amortized, on a straight-line basis, over periods of one to twelve
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