True Value 2009 Annual Report Download - page 32

Notes To Consolidated Financial Statements
($ in thousands)
2009 Financial Report 17
equipment – 3 to 12 years; and leasehold improvements – the
lesser of the life of the lease, without regard to options for renewal,
or the useful life of the underlying property.
GOODWILL
Goodwill represents the excess of cost over the fair value of
net assets acquired. Goodwill is tested for impairment using
the income approach which utilizes a discounted future 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
January 2, 2010, used a discount rate of 7% and included revenue
assumptions ranging from 0.0% to 1.3% increases in future years.
Rates used to discount cash flows are dependent upon True
Value’s estimated cost of capital. A 100-basis-point movement in
the discount rate did not change the conclusion of the analysis. In
evaluating the recoverability of goodwill, management estimates
each reporting unit’s fair value. In making this estimate, True
Value’s management relies on a number of factors including
operating results, business plans and present value techniques,
to discount anticipated future cash flows. Future revenue and
other financial assumptions were developed giving consideration
to the current and expected economic environment. True Value
completes its annual impairment assessment at the end of each
year and has determined that no impairment existed at January
2, 2010 or January 3, 2009.
At January 2, 2010 and January 3, 2009, Goodwill was comprised
of $78,429 for the hardware segment and $13,045 for the paint
manufacturing segment.
REVENUE RECOGNITION
True Value’s policy on items sold through its distribution network
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 transferred to
the customer, which is upon delivery of products. Provisions for
discounts, rebates and other cash consideration given to cus-
tomers, 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 vendors’ invoices are
received by True Value. Service revenue is comprised of advertis-
ing and markets, and transportation which amounted to $57,172
and $51,582 for 2009, respectively, $59,872 and $57,288 for 2008,
respectively, and $55,306 and $52,994 for 2007, respectively.
Amounts billed to members for advertising are included in net
revenue and recognized when the underlying advertisement is
run or when the related circulars are dropped. Amounts billed to
vendors for markets are included in net revenue and are recog-
nized in the months markets are held. Amounts billed to members
for shipping and handling 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 $47,543, $47,542 and
$42,416 in 2009, 2008 and 2007, respectively, and are included
in Cost of revenue.
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 underlying assets.
Otherwise, repair and maintenance expenditures are expensed
as incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs related to True Value’s manufac-
turing operations are expensed as incurred. Such costs amounted
to $1,017, $1,116 and $1,103 in 2009, 2008 and 2007, respec-
tively, 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 cumu-
lative 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 differences
are expected to reverse. At January 2, 2010, True Value concluded
that, based on the weight of available evidence, it is more likely
than not that the deferred tax assets will not be fully realized
due to True Value’s minimal taxable earnings after the distribu-
tion of the patronage dividend to the members, and that a full
valuation allowance is required. Deferred tax assets will only be
realized to the extent net future earnings, after the distribution of
the patronage dividend to the members, are retained and after
accumulated net operating losses are exhausted by True Value.
True Value and its subsidiaries file income tax returns in the United
States as well as all states and many local jurisdictions and China.
True Value is no longer open to audit for any U.S. federal, state
and local or non-U.S. income tax jurisdiction for years 2003 and
prior. True Value is still subject to state audits in seven states for
our tax year 2004 and remains open to audit for most jurisdic-
tions for years 2005 through current.