GameStop 2008 Annual Report Download - page 44

amortization, but they are subject to annual impairment testing. Leasehold rights which were recorded as a
result of the Micromania acquisition represent the value of rights of tenancy under commercial property leases
for properties located in France. Rights pertaining to individual leases can be sold by us to a new tenant or
recovered by us from the landlord if the exercise of the automatic right of renewal is refused. Leasehold rights
are amortized on a straight-line basis over the expected lease term not to exceed 20 years with no residual
value. Favorable leasehold interests represent the value of the contractual monthly rental payments that are less
than the current market rent at stores acquired as part of the Micromania acquisition or the EB merger.
Favorable leasehold interests are amortized on a straight-line basis over their remaining lease term with no
expected residual value. For additional information related to the Company’s intangible assets, see Note 7 of
“Notes to Consolidated Financial Statements.”
Other non-current assets are made up of deposits and deferred financing fees. The deferred financing fees
are associated with the Company’s revolving credit facility and the senior notes issued in October 2005 in
connection with the financing of the EB merger. 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 in October 2005 in
connection with the EB merger 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 Financial
Accounting Standards Board (“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.”
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