True Value 2010 Annual Report Download - page 38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
Financial Report 2010 17
LOW INTERESTBEARING NOTES RECEIVABLES
True Value has a program to provide low-interest bearing loans
to members to remodel existing stores into the DTV format. The
loans were originally issued for a period of five years; however,
beginning with October 2010, the program was enhanced by
increasing the loan period to seven years. The loans are generally
repaid through the members’ non Class B common stock portion
of the annual patronage dividend, as well as any maturing prom-
issory 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, interest income is imputed
and recorded using the effective interest method. At January1,
2011, True Value had $6,054 in loans outstanding discounted
at an average interest rate of 5.27% and $689 in unamortized
discount remaining. At January 2, 2010, True Value had $2,391 in
loans outstanding discounted at an average interest rate of 5.32%
and $259 in unamortized discount remaining. During 2010 and
2009, $128 and $30, respectively, of discount was recognized as a
reduction of revenue and $201 and $50, 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; transpor-
tation 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 manufac-
turing). This test is completed annually unless significant events
necessitate a more frequent test. The test completed at January 1,
2011, used a discount rate of 6.1% and included revenue assump-
tions ranging from 0.0% to 3.3% 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1, 2011 or
January 2, 2010.
At January 1, 2011 and January 2, 2010, 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 custom-
ers, 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 $54,511
and $51,813 for 2010, respectively, $57,172 and $51,582 for 2009,
respectively, and $59,872 and $57,288 for 2008, 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
recognized 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 $42,220, $47,543 and $47,542
in 2010, 2009 and 2008, respectively, and are included in Cost
of revenue.