Staples 2014 Annual Report Download - page 128

APPENDIX B
B-10 STAPLES Form 10-K
STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)
actual performance over the past several years. If we are
unable to execute our strategic and operational plans for
China and Australia, the reporting units’ financial results may
be lower than these projections, and additional impairment
charges may be incurred.
As of January 31, 2015, our Europe Online reporting unit has
$275 million of goodwill. This reporting unit has experienced
ongoing challenges transitioning from its legacy catalog
business model to an online model, and as a result it is at an
increased risk of an impairment.
With respect to all our reporting units, the following
are key factors that could potentially result in future
impairment charges:
• Deterioration in macroeconomic or industry conditions,
or a failure to manage our businesses successfully, could
result in our reporting units’ actual future financial results
to be lower than management’s projections;
• Adverse changes in market and economic conditions
could increase the reporting units’ WACC’s; and,
• A sustained and significant decline in our stock price
could result in a decline in the value of some or all of our
reporting units.
Impairment of Long-Lived Assets: We evaluate long-lived
assets for impairment whenever events and circumstances
indicate that the carrying value of an asset may not be
recoverable. Our policy is to evaluate long-lived assets for
impairment at the lowest level for which there are clearly
identifiable cash flows that are largely independent of the cash
flows of other assets and liabilities. Recoverability is measured
based upon the estimated undiscounted cash flows expected
to be generated from the use of an asset plus any net proceeds
expected to be realized upon its eventual disposition. Our cash
flow projections are based on historical cash flows and our
latest forecasts. An impairment loss is recognized if an asset’s
carrying value is not recoverable and if it exceeds its fair value.
We estimate the undiscounted cash flows that will be
generated over the asset’s remaining useful life, or, in the case
of an asset group, over the remaining useful life of the primary
asset from which the group derives its cash flow generating
capacity. Upon the occurrence of indicators of impairment,
we reassess the remaining useful life of the asset or primary
asset in the case of an asset group. The projections, estimates
and assumptions reflected in our long-lived asset impairment
testing require a significant degree of judgment on the part
of management.
In 2014 we recorded impairment charges of $60.1 million, of
which $36.0 million related to fixed assets at North American
retail stores that are closing pursuant to our plan to close
at least 225 North American stores by the end of 2015. In
addition, we determined that the fixed assets at certain other
North American retail stores were impaired because they
are not recoverable from future cash flows, primarily due
to declining sales, and as a result we recorded impairment
charges of $21.7 million. In general, we consider the individual
store to be the lowest level at which to test store assets for
impairment. For stores that have been approved for closure,
we estimate future cash flows to be generated by the stores
through their planned closure dates. For other stores, we
estimate future cash flows over the stores’ remaining lease
terms, or if the store is owned, over the remaining depreciable
life of the building. Forecasting future sales and profitability
for an individual store, in some cases over long periods,
requires a significant amount of judgment. If actual results
are less favorable than management’s projections, estimates
and assumptions, additional write-offs in the future may
be necessary.
For stores that failed the recoverability test, we measured the
fair value of the impaired assets using the income approach,
specifically the discounted cash flow method, which
incorporated Level 3 inputs as defined in ASC Topic 820. We
considered the expected net cash flows to be generated by
the use of the assets through the store closure dates, as well
as the expected cash proceeds from the disposition of the
assets, if any.
Pension Benefits: Our pension costs and obligations are
dependent on various assumptions. Our major assumptions
primarily relate to expected long-term rates of return on plan
assets, discount rates and inflation. In estimating the expected
return on plan assets, we take into account the historical
performance for the major asset classes held, or anticipated to
be held, by the applicable pension funds and current forecasts
of future rates of return for those asset classes. We base the
discount rate on the interest rate on high quality (AA rated)
corporate bonds that have a maturity approximating the term
of the related obligations. We also make assumptions regarding
employee demographic factors such as retirement patterns,
mortality, turnover and the rate of compensation increases.
Based on our analysis of the financial impact of pension
obligation assumptions and estimates, we do not believe
these assumptions and estimates will have a material impact
on our financial statements. The effect on pension obligations
at January 31, 2015 of a change in discount rate and other
assumptions is included in Note L - Pension and Other Post-
Retirement Benefit Plans of the Notes to the Consolidated
Financial Statements.
Income Taxes: The amount of income taxes we pay is subject
to ongoing audits by federal, state and foreign tax authorities,
which may result in proposed assessments. Our estimate for
the potential outcome for any uncertain tax issue is highly
judgmental. We assess our income tax positions and record
tax benefits for all years subject to examination based upon
our evaluation of the facts, circumstances and information
available at the reporting date. For those tax positions
for which it is more likely than not that a tax benefit will be
sustained, we record the largest amount of tax benefit likely of
being realized upon settlement with a taxing authority that has
full knowledge of all relevant information. Interest is accrued,
where applicable. We recognize net tax-related interest and
penalties in income tax expense. If we do not believe that
it is more likely than not that a tax benefit will be sustained,
no tax benefit is recognized. However, our future results may
include favorable or unfavorable adjustments to our estimated
tax liabilities due to closure of income tax examinations, new
regulatory or judicial pronouncements, or other relevant events.
As a result, our effective tax rate may fluctuate significantly on
a quarterly and annual basis.