True Value 2009 Annual Report Download - page 31

Notes To Consolidated Financial Statements
($ in thousands)
16 True Value Company
1. DESCRIPTION OF BUSINESS AND
ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
True Value Company (“True Value”) is a member-owned wholesaler
cooperative of hardware and related merchandise. True Value also
manufactures and sells paint and paint applicators. True Value’s
goods and services are sold predominately within the United
States, primarily to retailers of hardware, industrial distributors,
garden centers and rental retailers who have entered into retail
agreements with it. True Value also provides to its members value-
added services such as marketing, advertising, merchandising, and
store location and design services. All members are considered
related parties; however, no one member significantly impacts
True Value’s financial statements.
CONSOLIDATION
The Consolidated Financial Statements include the accounts of
True Value and all wholly owned subsidiaries.
REPORTING YEAR
True Value’s fiscal year ends the Saturday closest to December
31. Fiscal year 2009 ended on January 2, 2010 and contained 52
weeks. Fiscal year 2008 ended on January 3, 2009 and contained
53 weeks. Fiscal year 2007 ended on December 29, 2007 and con-
tained 52 weeks.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years’
Consolidated Financial Statements and the notes thereto to con-
form to the current year’s presentation. These reclassifications
had no effect on Net margin for any period or on Total mem-
bers’ equity at the balance sheet dates.
CASH EQUIVALENTS
True Value classifies all highly liquid investments with an original
maturity of three months or less as cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is determined principally
on the basis of past collection experience applied to ongoing
evaluations of True Value’s receivables and the risks of repayment
after applying set-off rights for any payment obligations owed by
True Value to the member. The allowance was $6,143 and $2,434
as of January 2, 2010 and January 3, 2009, respectively. True Value
considers accounts receivable past due if invoices remain unpaid
past their due date and writes off uncollectible receivables after
exhausting all collection efforts.
INVENTORIES
Merchandise inventory is stated at the lower of cost, determined
on the first-in, first-out basis, or market value. Manufactured inven-
tory is stated at the lower of cost, determined on a standard cost
method that approximates the first-in, first-out basis, or market
value. The lower of cost or market value considers the estimated
realizable value in the current economic environment associated
with disposing of surplus and/or damaged/obsolete inventories.
True Value’s ending 2009 inventory valuation reserve of $18,040
increased by $388 from the ending 2008 reserve of $17,652 mainly
due to increased reserve on specific inventory items. True Value
calculated the estimated realizable value based on an analysis
of historical trends related to its distressed inventory. In its anal-
ysis, True Value considers historical data on its ability to return
inventory to suppliers, to transfer inventory to other distribution
centers, to sell inventory to members through a price reduction
process and to sell remaining inventory to liquidators. The cost
of inventory also includes indirect costs (such as logistics, manu-
facturing, freight-in and support costs) incurred to bring inventory
to its existing locations for resale and vendor rebates. These indi-
rect costs and vendor rebates are treated as net product costs,
classified in inventory and subsequently recorded as cost of
revenue as the product is sold (see Note 2, “Inventories”).
INTERESTFREENOTES RECEIVABLES
True Value has a program to provide interest free loans to members
to open new stores or make store expansions in the Destination True
Value (“DTV”) format. The loans are for a period of 10 years and
are generally repaid through the members’ non Class B common
stock portion of the annual patronage dividend and any promis-
sory note interest due to the members. True Value discounts the
loan amount using market rates at the time of the loan. The dif-
ference between the face value of the loan and the discounted
amount is amortized on a straight-line basis over the loan period.
In addition, interest income is imputed and recorded using the
effective interest method. At January 2, 2010, True Value had
$6,345 in loans outstanding discounted at an average interest
rate of 7.08% and $1,645 in unamortized discount remaining.
At January 3, 2009, True Value had $4,555 in loans outstanding
discounted at an average interest rate of 8.19% and $1,605 in
unamortized discount remaining. During 2009 and 2008, $264
and $179, respectively, of discount was recognized as a reduction
of revenue and $277 and $154, respectively, in imputed interest
income was recognized.
PROPERTIES
Properties are recorded at cost. Depreciation and amortization are
computed by using the straight-line method over the following
estimated useful lives: buildings and improvements – 10 to 40 years;
machinery and warehouse equipment – 7 to 10 years; office and
computer equipment and software – 3 to 8 years; transportation