True Value 2007 Annual Report Download - page 39

18 | TRUE VALUE COMPANY
N O T E S T O
CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
Goodwill
Goodwill represents the excess of cost over the fair value of net
assets acquired. Goodwill is tested for impairment using a dis-
counted cash flow analysis for each reporting unit (Hardware
and Paint manufacturing). This test is completed annually unless
significant events necessitate a more frequent test. The test
completed at December 29, 2007, used a discount rate of 10%
and assumed a modest revenue increase in future years. Rates
used to discount cash flows are dependent upon interest rates
and the cost of capital at a point in time. A 100-basis-point
movement in the discount rate did not significantly impact the
analysis. In evaluating the recoverability of goodwill, manage-
ment estimates each reporting unit’s fair value. In making this
estimate, True Value’s management relies on a number of fac-
tors including operating results, business plans and present
value techniques, to discount anticipated future cash flows. True
Value completes its annual impairment assessment at the end
of each year and has determined that no impairment existed at
December 29, 2007 or December 30, 2006.
At December 29, 2007 and December 30, 2006, Goodwill was
comprised of $78,429 for the hardware segment and $13,045 for
the paint segment.
Revenue Recognition
True Value’s policy on items sold through its distribution net-
work is to recognize product revenue when persuasive evidence
of an arrangement exists, delivery has occurred, the price is
fixed or determinable and collectibility is reasonably assured.
Revenue is not recognized until title and risk of loss have trans-
ferred to the customer, which is upon delivery of products.
Provisions for discounts, rebates and other cash consideration
given to customers, and returns are provided for at the time the
related sales are recorded and are reflected as a reduction of
sales. Certain promoted items are sold with the right of return;
True Value has established a reserve in anticipation of these
estimated returns. Product revenue on items shipped directly to
the member from vendors is recognized at the time the ven-
dors’ invoices are received by True Value. Service revenue is
comprised of advertising and markets, and transportation which
amounted to $55,306 and $52,994 for 2007, respectively, $55,809
and $55,504 for 2006, respectively, and $57,047 and $53,922 for
2005, respectively. Amounts billed to members for advertising
are included in net revenue and recognized when the underly-
ing advertisement is run or when the related circulars are
dropped. Amounts billed to members for shipping and han-
dling costs are included in net revenue and are recognized
when the services are provided.
Advertising Expenses
Advertising costs are expensed in the period the advertising
takes place. Such costs amounted to $26,750, $28,267 and
$31,999 in 2007, 2006 and 2005, respectively, and are included in
Cost of revenue.
Interest Rate Caps
True Value has purchased interest rate caps that limit its risk on
$25,000 of the variable-rate revolving credit facility to a maximum
underlying London Interbank Offering Rate (“LIBOR”) of 4.5%
through August 2008. The three-month LIBOR at December 29,
2007, was approximately 4.7%. This interest rate cap instrument
is considered speculative and is carried at current market value.
Repairs and Maintenance Expense
Expenditures which extend the useful lives of True Value’s
property and equipment are capitalized and depreciated on a
straight-line basis over the remaining useful lives of the under-
lying assets. Otherwise, repair and maintenance expenditures
are expensed as incurred.
Research and Development Costs
Research and development costs related to True Value’s manu-
facturing operations are expensed as incurred. Such costs
amounted to $1,103, $1,046 and $987 in 2007, 2006 and 2005,
respectively, and are included in Logistics and manufacturing
expenses.
Shipping and Handling Costs
Amounts incurred for shipping and handling are included in
Cost of revenue.
Income Taxes
Deferred tax assets and liabilities are determined based on
cumulative temporary differences between the amounts shown
on the financial statements and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differ-
ences are expected to reverse. At December 29, 2007, True
Value concluded that, based on the weight of available evi-
dence, it is more likely than not that the deferred tax assets will
not be realized, and that a full valuation allowance is required.
Deferred tax assets will only be realized to the extent future
earnings are taxable to True Value and not allocated to mem-
bers as tax-deductible patronage dividends.
Per Share Information
True Value’s Redeemable Class A voting common stock is
owned by members. True Value’s Redeemable Class B nonvot-
ing common stock now outstanding was issued to members in
partial payment of the annual patronage dividend. There is no