GameStop 2007 Annual Report Download - page 44

The deferred financing fees are being amortized over five and seven years to match the terms of the revolving
credit facility and the senior notes, respectively. Deferred financing fees incurred in connection with the
issuance of the senior floating rate notes were included in deferred financing fees in the balance sheet and were
being amortized over six years to match the term of the senior floating rate notes. The remaining balance of the
deferred financing fees on the senior floating rate notes was written off to debt extinguishment expense during
fiscal 2007 when the notes were redeemed.
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, 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. The Company’s 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) is in conformance with GAAP, as clarified by the Chief Accountant of the
SEC in a February 2005 letter to the American Institute of Certified Public Accountants. For leases that contain
predetermined fixed escalations of the minimum rent, we recognize the related rent expense on a straight-line
basis and include the impact of escalating rents for periods in which we are reasonably assured of exercising
lease options and we include in the lease term any period during which the Company is not obligated to pay
rent while the store is being constructed, or “rent holiday.”
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. As a
result of our operations in many foreign countries, our global tax rate is derived from a combination of
applicable tax rates in the various jurisdictions in which we operate. We base our estimate of an annual
effective tax rate at any given point in time on a calculated mix of the tax rates applicable to our company and to
estimates of the amount of income to be derived in any given jurisdiction. We file our tax returns based on our
understanding of the appropriate tax rules and regulations. However, complexities in the tax rules and our
operations, as well as positions taken publicly by the taxing authorities, may lead us to conclude that accruals
for uncertain tax positions are required. We generally maintain accruals for uncertain tax positions until
examination of the tax year is completed by the taxing authority, available review periods expire or additional
facts and circumstances cause us to change our assessment of the appropriate accrual amount.
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