Circuit City 2002 Annual Report Download - page 32

Derivative Financial Instruments
- The Company adopted Statement of Financial Accounting Standards
("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, effective January 1,
2001. SFAS 133 requires that all derivative financial instruments be recognized as either assets or liabilities in
the balance sheet based on their fair values. Changes in the fair values are required to be reported in earnings or
other comprehensive income depending on the use of the derivative and whether it qualifies for hedge
accounting. Derivative instruments are designated and accounted for as either a hedge of a recognized asset or
liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For derivatives designated as
effective cash flow hedges, changes in fair values are recognized in other comprehensive income. Changes in fair
values related to fair value hedges as well as the ineffective portion of cash flow hedges are recognized in
earnings (see Note 6).
The Company does not use derivative instruments for speculative or trading purposes. Derivative instruments
may be used to manage exposures related to changes in foreign currency exchange rates and interest rate risk on
variable rate indebtedness.
Advertising Costs
- Direct response advertising costs, consisting primarily of catalog preparation, printing and
postage expenditures are amortized over the period of catalog distribution during which the benefits are expected.
Advertising expenditures relating to the Company's national advertising campaign and other television
advertising costs are expensed in the period the advertising takes place.
Advertising costs, net of rebates from vendors, of $44.1 million in 2002, $53.0 million in 2001 and $54.1 million
in 2000 are included in the accompanying Consolidated Statements of Operations. Prepaid expenses at December
31, 2002 and 2001 include deferred advertising costs of $3.6 million and $6.3 million, respectively, which are
reflected as an expense during the period benefited.
Research and Development Costs
- Costs incurred in connection with research and development are expensed as
incurred. Such expenses for the years ended December 31, 2002, 2001 and 2000 aggregated approximately
$1,036,000, $1,539,000 and $1,868,000, respectively.
Goodwill, net –The cost in excess of fair value of net assets of businesses acquired is recorded in the
accompanying consolidated balance sheets as "Goodwill." Prior to the adoption of SFAS 142, "Goodwill and
Other Intangible Assets," in fiscal 2002, goodwill was amortized on a straight-line basis over periods of 10 to 40
years. As of January 1, 2002, goodwill is no longer amortized. Annual amortization of goodwill was an expense
of $1,605,000 in 2001 and $1,698,000 in 2000. The transitional impairment analysis performed under SFAS 142
during 2002 resulted in an implied fair value of the goodwill of zero. See Note 2 for the impact of the adoption of
SFAS 142 on the consolidated financial statements
Income taxes
- Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary
differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax
laws and rates. Valuation allowances are provided for deferred tax assets to the extent it is more likely than not
that deferred tax assets will not be recoverable against future taxable income.
Evaluation of Long
-lived Assets – Long-lived assets are evaluated for recoverability in accordance with SFAS
144 whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an
asset for recoverability, the Company estimates the future cash flows expected to result from the use of the asset
and eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over
the fair market value of the asset is recognized.
Net Income (Loss) Per Common Share
– The Company calculates net income (loss) per share in accordance with
SFAS 128, "Earnings Per Share". Net income (loss) per common share-basic was calculated based upon the
weighted average number of common shares outstanding during the respective periods. Net income (loss) per
common share-diluted was calculated based upon the weighted average number of common shares outstanding
and included the equivalent shares for dilutive options outstanding during the respective periods except in loss
periods, where the effect is anti
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dilutive.
The weighted average common shares outstanding for the computation of basic earnings per common share for
2002, 2001 and 2000 were 34.1 million, 34.1 million and 34.3 million, respectively. Additionally, in 2001,