Staples 2015 Annual Report Download - page 112

APPENDIX B
B-9 STAPLES Form 10-K
STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)
units experienced improved sales and profitability in 2015,
the valuations for these reporting units are predicated on
continued improvement in the future.
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 and projections. 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 2015 we recorded total impairment charges of $50 million.
Of this amount, $22 million relates to fixed assets, primarily at
certain North American and European retail stores (locations
not yet identified for closure) that we determined were not
recoverable from future cash flows, primarily due to declining
sales. The charges also include $6 million primarily 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, and $22 million related to certain
software assets in our North American Stores & Online
segment which were disposed of in 2015 and for which we
concluded the fair value was not material.
For retail store impairment testing, 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 or other assets 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
Accounting Standards Codification (“ASC”) Topic 820 Fair
Value Measurement (“ASC Topic 820”). We considered the
expected net cash flows to be generated by the use of the
assets over the remaining useful life of the primary asset, 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 30, 2016 of a change in discount rate and other
assumptions is included in Note L - Pension and Other Post-
Retirement Benefit Plans in 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, the expiration of
statutes of limitations, or other relevant events. As a result, our
effective tax rate may fluctuate significantly on a quarterly and
annual basis.
We record deferred income tax assets for timing differences
related to tax payments. We record a valuation allowance to
reduce our deferred income tax assets to the amount that
is more likely than not to be realized. We have considered
estimated future taxable income and ongoing tax planning
strategies in assessing the amount needed for the valuation
allowance. If actual results differ unfavorably from those
estimates used, we may not be able to realize all or part of our
net deferred tax assets and additional valuation allowances
may be required.