GameStop 2006 Annual Report Download - page 44

the store credit given to the customer. In valuing inventory, management is required to make assumptions regarding
the necessity of reserves required to value potentially obsolete or over-valued items at the lower of cost or market.
Management considers quantities on hand, recent sales, potential price protections and returns to vendors, among
other factors, when making these assumptions.
Property and Equipment. Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation on furniture, fixtures and equipment is computed using the straight-line method over
estimated useful lives (ranging from two to eight years). Maintenance and repairs are expensed as incurred, while
betterments and major remodeling costs are capitalized. Leasehold improvements are capitalized and amortized
over the shorter of their estimated useful lives or the terms of the respective leases, including renewal options in
which the exercise of the option is reasonably assured (generally ranging from three to ten years). Costs incurred to
third parties in purchasing management information systems are capitalized and included in property and
equipment. These costs are amortized over their estimated useful lives from the date the systems become
operational. The Company periodically reviews its property and equipment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization
periods should be accelerated. The Company assesses recoverability based on several factors, including manage-
ment’s intention with respect to its stores and those stores’ projected undiscounted cash flows. An impairment loss
is recognized for the amount by which the carrying amount of the assets exceeds their fair value, as approximated by
the present value of their projected cash flows. As a result of the mergers and an analysis of assets to be abandoned,
the Company impaired assets totaling $9.0 million in fiscal 2005 and $1.9 million in fiscal 2006 prior to October 8,
2006, the anniversary of the mergers. These impairment costs are included in merger-related expenses in the
consolidated statements of operations. Write-downs incurred by the Company through February 3, 2007 which
were not related to the mergers have not been material.
Merger-Related Costs. In connection with the mergers, management incurred merger-related costs and
integration activities which have resulted in involuntary employment terminations, lease terminations, disposals of
property and equipment and other costs and expenses. Approximately $64.3 million of these costs were charged to
acquisition costs, representing a portion of the recorded goodwill, and approximately $21.1 million were charged to
costs in the accompanying consolidated statement of operations. The remaining liability for involuntary termination
benefits covers severance amounts, payroll taxes and benefit costs for former EB employees, primarily in general
and administrative functions in EB’s Pennsylvania corporate office and distribution center and Nevada call center
which have been closed. Termination of these employees began in October 2005 and is now complete. The
Pennsylvania corporate office and distribution center were owned facilities that were sold in July 2006. These assets
were classified in the January 28, 2006 consolidated balance sheet as “Assets held for sale”.
The liability for lease terminations is associated with stores to be closed. If the Company is unsuccessful in
negotiating lease terminations or sublease agreements, the lease liability will be paid over the remaining lease
terms, the majority of which expire in the next 3 to 5 years, with the last of such leases expiring in 2015. The
Company intends to close these stores in the next 9 to 12 months. The disposals of property and equipment are
related to assets which were either impaired or have been either abandoned or disposed of due to the mergers.
Certain costs associated with the disposition of these assets remained accrued until the assets were disposed of and
the costs were paid. The disposition of property and equipment is now complete.
Merger-related costs include professional fees, financing costs and other costs associated with the mergers and
include certain costs associated with integrating the operations of Historical GameStop and EB, including
relocation costs. The Company finalized integration plans and related liabilities and all integration activities in
fiscal 2006. Rebranding of EB stores to the GameStop name is expected to be completed in the next 12 to 18 months.
Note 2 of “Notes to Consolidated Financial Statements” provides additional information on the merger costs and
related liabilities.
Goodwill. Goodwill, aggregating $340.0 million was recorded in the acquisition of Funco in 2000 and
through the application of “push-down” accounting in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 54 (“SAB 54”) in connection with the acquisition of Babbage’s in 1999 by a subsidiary of
Barnes & Noble, Inc. (“Barnes & Noble”). Goodwill in the amount of $2.9 million was recorded in connection with
the acquisition of Gamesworld Group Limited in 2003. Goodwill in the amount of $1,074.9 million was recorded in
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