GameStop 2005 Annual Report Download - page 38

Europe, based upon the similar economic characteristics of operations in those regions. The Company employed the
services of an independent valuation specialist to assist in the allocation of goodwill resulting from the mergers to
the four reporting units as of October 8, 2005, the date of the mergers. The Company also completed its annual
impairment test of goodwill as of the first day of the fourth quarter of fiscal 2005 and concluded that none of its
goodwill was impaired. Note 7 of “Notes to Consolidated Financial Statements” of the Company provides
additional information concerning goodwill.
Intangible Assets. Intangible assets consist of non-compete agreements, point-of-sale software and amounts
attributed to favorable leasehold interests acquired in the mergers and are included in other non-current assets in the
consolidated balance sheet. The total weighted-average amortization period for the intangible assets, excluding
goodwill, is approximately four years. The intangible assets are being amortized based upon the pattern in which the
economic benefits of the intangible assets are being utilized, with no expected residual value. The deferred
financing fees associated with the Company’s revolving credit facility and the senior notes and senior floating rate
notes issued in connection with the financing of the mergers are separately shown in the consolidated balance sheet.
The deferred financing fees are being amortized over five, six and seven years to match the terms of the revolving
credit facility, the senior floating rate notes and the senior notes, respectively.
Cash Consideration Received from Vendors. The Company and its vendors participate in cooperative
advertising programs and other vendor marketing programs in which the vendors provide the Company with
cash consideration in exchange for marketing and advertising the vendors’ products. Our accounting for cooperative
advertising arrangements and other vendor marketing programs, in accordance with FASB Emerging Issues Task
Force Issue 02-16 or “EITF 02-16,” results in a portion of the consideration received from our vendors reducing the
product costs in inventory. The consideration serving as a reduction in inventory is recognized in cost of sales as
inventory is sold. The amount of vendor allowances recorded as a reduction of inventory is determined by
calculating the ratio of vendor allowances in excess of specific, incremental and identifiable advertising and
promotional costs to merchandise purchases. The Company then applies this ratio to the value of inventory in
determining the amount of vendor reimbursements recorded as a reduction to inventory reflected on the balance
sheet. Because of the variability in the timing of our advertising and marketing programs throughout the year, the
Company uses significant estimates in determining the amount of vendor allowances recorded as a reduction of
inventory in interim periods, including estimates of full year vendor allowances, specific, incremental and
identifiable advertising and promotional costs, merchandise purchases and value of inventory. Estimates of full
year vendor allowances and the value of inventory are dependent upon estimates of full year merchandise purchases.
Determining the amount of vendor allowances recorded as a reduction of inventory at the end of the fiscal year no
longer requires the use of estimates as all vendor allowances, specific, incremental and identifiable advertising and
promotional costs, merchandise purchases and value of inventory are known.
Although management considers its advertising and marketing programs to be effective, we do not believe that
we would be able to incur the same level of advertising expenditures if the vendors decreased or discontinued their
allowances. In addition, management believes that the Company’s revenues would be adversely affected if its
vendors decreased or discontinued their allowances, but management is unable to quantify the impact.
Lease Accounting. As previously disclosed, in fiscal 2004, the Company, similar to many other retailers,
revised its method of accounting for rent expense (and related deferred rent liability) and leasehold improvements
funded by landlord incentives for allowances under operating leases (tenant improvement allowances) to conform
to GAAP, as clarified by the Chief Accountant of the SEC in a February 2005 letter to the American Institute of
Certified Public Accountants. For all stores opened since the beginning of fiscal 2002, the Company had calculated
straight-line rent expense using the initial lease term, but was generally depreciating leasehold improvements over
the shorter of their estimated useful lives or the initial lease term plus the option periods. The Company corrected its
calculation of straight-line rent expense to include the impact of escalating rents for periods in which it is reasonably
assured of exercising lease options and to include in the lease term any period during which the Company is not
obligated to pay rent while the store is being constructed (“rent holiday”). The Company also corrected its
calculation of depreciation expense for leasehold improvements for those leases which do not include an option
period. Because the effects of the correction were not material to any previous years, a non-cash, after-tax
adjustment of $3.3 million was made in the fourth quarter of fiscal 2004 to correct the method of accounting for rent
expense (and related deferred rent liability). Of the $3.3 million after-tax adjustment, $1.8 million pertained to the
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