American Eagle Outfitters 2004 Annual Report Download - page 48

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Part II
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates based on currently available information.
Changes in facts and circumstances may result in revised estimates.
Restatement of Prior Financial Information
On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”)
issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain
operating lease accounting issues and their application under generally accepted accounting principles (“GAAP”). In
light of this letter, the Company’s management initiated a review of its lease-related accounting and determined that
its historical method of accounting for rent holidays and tenant allowances, as more fully described below, was not in
accordance with GAAP. As a result, the Company restated its previously filed Consolidated Financial Statements for
the years ended January 31, 2004 and February 1, 2003. The Company also restated its quarterly financial
information for Fiscal 2003 and the first three quarters of Fiscal 2004, as shown in Note 16 of the Consolidated
Financial Statements. The restatement also affects periods prior to Fiscal 2002. The impact of the restatement on
prior periods has been reflected as a cumulative adjustment of $5.3 million to retained earnings as of February 2,
2002 in the Consolidated Statement of Stockholders' Equity.
Historically, the Company has recognized straight line rent expense for leases beginning on the store opening date.
This had the effect of excluding the build-out period of its stores from the calculation of the period over which it
expenses rent and recognizes construction allowances. In accordance with Financial Accounting Standards Board
Technical Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent Increases, the Company is now
changing this practice to include the build-out period in the calculations of rent expense and construction allowance
amortization.
Additionally, in accordance with Financial Accounting Standards Board Technical Bulletin No. 88-1, Issues Relating
to Accounting for Leases, the Company is changing its classification of construction allowances on its Consolidated
Financial Statements to record them as deferred liabilities, which will be amortized as a reduction to rent expense.
Furthermore, construction allowances will be presented within operating activities on its Consolidated Statements of
Cash Flows. Historically, construction allowances have been classified on the Company's Consolidated Balance
Sheets as a reduction of property and equipment and the related amortization had been classified as a reduction to
depreciation and amortization expense (over the lesser of the useful life or the life of the lease) on the consolidated
statements of operations. The Company's consolidated statements of cash flows have historically reflected
construction allowances as a reduction of capital expenditures within investing activities.
The Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q
for the restatement. Accordingly, the financial statements and related financial information contained in such reports
should no longer be relied upon. All referenced amounts for prior periods in this Annual Report on Form 10-K are
presented on a restated basis.