GameStop 2010 Annual Report Download - page 82

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Table of Contents
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Taxes
Income tax expense includes United States, state, local and international income taxes, plus a provision for U.S. taxes on undistributed
earnings of foreign subsidiaries not deemed to be indefinitely reinvested. Deferred tax assets and liabilities are recognized for the tax consequences
of temporary differences between the financial reporting basis and the tax basis of existing assets and liabilities using enacted tax rates. Valuation
allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. In accordance with GAAP, we
maintain accruals for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review
periods expire or additional facts and circumstances cause us to change our assessment of the appropriate accrual amount (see Note 12).
U.S. income taxes have not been provided on $504.9 million of undistributed earnings of foreign subsidiaries as of January 29, 2011. The
Company reinvests earnings of foreign subsidiaries in foreign operations and expects that future earnings will also be reinvested in foreign
operations indefinitely.
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. For leases that contain
predetermined fixed escalations of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and includes the
impact of escalating rents for periods in which it is reasonably assured of exercising lease options and the Company includes in the lease term any
period during which the Company is not obligated to pay rent while the store is being constructed.
Foreign Currency Translation
GameStop has determined that the functional currencies of its foreign subsidiaries are the subsidiaries' local currencies. 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 selling, general and administrative expenses and amounted to $2.5 million, $3.9 million and
($10.0) million for the 52 weeks ended January 29, 2011, January 30, 2010 and January 31, 2009, respectively. The foreign currency transaction
gains and losses are primarily due to the decrease or increase in the value of the U.S. dollar compared to the functional currencies in the countries the
Company operates in internationally. In fiscal 2010, the foreign currency transaction gains are primarily due to the decrease in the value of the
U.S. dollar compared to the Canadian dollar and the Australian dollar. In fiscal 2009, the foreign currency transaction gains are primarily due to the
decrease in the value of the U.S. dollar compared to the euro, the Canadian dollar and the Australian dollar. The foreign currency transaction losses
in fiscal 2008 are primarily related to the increase in the value of the U.S. dollar compared to the euro, the Canadian dollar and the Australian dollar.
The net foreign currency transaction loss in the 52 weeks ended January 31, 2009 included a $3.5 million net loss related to the change in foreign
exchange rates related to the funding of the Micromania acquisition recorded in merger-related expenses.
The Company uses forward exchange contracts, foreign currency options and cross-currency swaps, (together, the "Foreign Currency
Contracts") to manage currency risk primarily related to intercompany loans denominated in non-functional currencies and certain foreign currency
assets and liabilities. These Foreign Currency Contracts are not designated as hedges and, therefore, changes in the fair values of these derivatives
are recognized in earnings, thereby offsetting the current earnings effect of the re-measurement of related intercompany loans and foreign currency
assets and liabilities (see Note 5). F-12