GameStop 2006 Annual Report Download - page 78

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Advertising Expenses
The Company expenses advertising costs for newspapers and other media when the advertising takes place.
Advertising expenses for newspapers and other media during the 53 weeks ended February 3, 2007 and the 52 weeks
ended January 28, 2006 and January 29, 2005, were $16,043, $12,448 and $8,881, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS 109 utilizes an asset and
liability approach, and deferred taxes are determined based on the estimated future tax effect of differences between
the financial reporting and tax bases of assets and liabilities using enacted tax rates.
U.S. income taxes have not been provided on remaining undistributed earnings of foreign subsidiaries as of
February 3, 2007. The Company did not have undistributed earnings of foreign subsidiaries prior to the mergers.
The Company reinvested earnings of foreign subsidiaries in foreign operations since the mergers and expects that
future earnings will also be reinvested in foreign operations indefinitely.
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 generally accepted
accounting principles (“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. In fiscal 2004, 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 $3,312 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 $3,312 after-tax adjustment,
$1,761 pertained to the accounting for rent holidays, $1,404 pertained to the calculation of straight-line rent expense
to include the impact of escalating rents for periods in which the Company is reasonably assured of exercising lease
options and $147 pertained to the calculation of depreciation expense for leasehold improvements for the small
portion of leases which do not include an option period. The aggregate effect of these corrections relating to prior
years was $1,929. The correction does not affect historical or future cash flows or the timing of payments under
related leases.
Foreign Currency Translation
GameStop has determined that the functional currencies of its foreign subsidiaries are the subsidiaries’ local
currencies. The accounts of the foreign subsidiaries are translated in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation. The assets and liabilities of the subsidiaries are
translated at the applicable exchange rate as of the end of the balance sheet date and revenue and expenses are
translated at an average rate over the period. Currency translation adjustments are recorded as a component of other
comprehensive income. Transaction gains and (losses) are included in net income and amounted to ($962), $2,606
and ($20) for the 53 weeks ended February 3, 2007 and the 52 weeks ended January 28, 2006 and January 29, 2005,
respectively.
The merger with Electronics Boutique has significantly increased our exposure to foreign currency fluctu-
ations because a larger amount of our business is now transacted in foreign currencies. While Historical GameStop
F-10
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)