True Value 2010 Annual Report Download - page 37

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 years 2010 and 2009 ended on January 1, 2011 and Janu-
ary2, 2010, respectively, and contained 52 weeks. Fiscal year 2008
ended on January 3, 2009 and contained 53 weeks.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years’ Con-
solidated Financial Statements and the notes thereto to conform
to the current year’s presentation. These reclassifications had no
effect on Net margin for any period or on Total members’ 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 $6,111 and $6,143
as of January 1, 2010 and January 2, 2010, 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 2010 inventory valuation reserve of $12,903
decreased by $5,137 from the ending 2009 reserve of $18,040
mainly due to lower levels of discontinued inventory items. True
Value calculated the estimated realizable value based on an
analysis of historical trends related to its distressed inventory.
In its analysis, 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,
manufacturing, freight-in and support costs) incurred to bring
inventory to its existing locations for resale, as well as vendor
rebates. These indirect 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, as well
as any maturing promissory notes and promissory note interest
due to the members. True Value discounts the loan amount using
market rates at the time of the loan. The difference between the
face value of the loan and the discounted amount is amortized
on a straight-line basis over the loan period. In addition, inter-
est income is imputed and recorded using the effective interest
method. At January 1, 2011, True Value had $9,486 in loans
outstanding discounted at an average interest rate of 6.39% and
$2,392 in unamortized discount remaining. At January 2, 2010,
True Value had $6,345 in loans outstanding discounted at an aver-
age interest rate of 7.08% and $1,645 in unamortized discount
remaining. During 2010 and 2009, $319 and $264, respectively, of
discount was recognized as a reduction of revenue and $336 and
$277, respectively, in imputed interest income was recognized.