Home Depot 2002 Annual Report Download - page 35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE HOME DEPOT, INC. AND SUBSIDIARIES
The Company and its eligible subsidiaries file a consoli-
dated U.S. federal income tax return. Non-U.S. subsidiaries,
which are consolidated for financial reporting purposes, are not
eligible to be included in consolidated U.S. federal income tax
returns. Separate provisions for income taxes have been deter-
mined for these entities. The Company intends to reinvest the
unremitted earnings of its non-U.S. subsidiaries and postpone
their remittance indefinitely. Accordingly, no provision for
U.S. income taxes for non-U.S. subsidiaries was recorded in
the accompanying Consolidated Statements of Earnings.
DEPRECIATION AND AMORTIZATION
The Company’s buildings, furniture, fixtures and equipment
are depreciated using the straight-line method over the estimated
useful lives of the assets. Improvements to leased assets are
amortized using the straight-line method over the life of the
lease or the useful life of the improvement, whichever is shorter.
The Company’s property and equipment is depreciated using
the following estimated useful lives:
Life
Buildings 10-45 years
Furniture, fixtures and equipment 5-20 years
Leasehold improvements 5-30 years
Computer equipment and software 3-5 years
REVENUES
The Company recognizes revenue, net of estimated returns,
at the time the customer takes possession of merchandise or
receives services. When the Company receives payment from
customers before the customer has taken possession of the
merchandise or the service has been performed, the amount
received is recorded in Deferred Revenue in the accompanying
Consolidated Balance Sheets.
SERVICE REVENUES
Total revenues include service revenues generated through a variety
of installation and home maintenance programs in Home Depot
and EXPO stores as well as through the Company’s subsidiary,
HD Builder Solutions Group, Inc. In these programs, the customer
selects and purchases materials for a project and the Company
provides or arranges professional installation. When the Company
subcontracts the installation of a project and the subcontractor
provides material as part of the installation, both the material and
labor are included in service revenues. The Company recognizes
this revenue when the service for the customer is completed. All
payments received prior to the completion of services are recorded
in Deferred Revenue in the accompanying Consolidated Balance
Sheets. Net service revenues, including the impact of deferred
revenue, were $2.0 billion, $1.6 billion and $1.3 billion for the
fiscal years 2002, 2001 and 2000, respectively.
SELF INSURANCE
The Company is self-insured for certain losses related to general
liability, product liability, workers’ compensation and medical
claims. The expected ultimate cost for claims incurred as of
the balance sheet date is not discounted and is recognized
as a liability. The expected ultimate cost of claims is estimated
based upon analysis of historical data and actuarial estimates.
ADVERTISING
Television and radio advertising production costs along with media
placement costs are expensed when the advertisement first appears.
Included in Current Assets in the accompanying Consolidated
Balance Sheets are $20 million and $15 million at the end of
fiscal years 2002 and 2001, respectively, relating to prepayments
of production costs for print and broadcast advertising.
Gross advertising expense is classified as Selling and Store
Operating Expenses and was $895 million, $817 million and
$722 million, in fiscal years 2002, 2001 and 2000, respectively.
Advertising allowances earned from vendors fully offset gross
advertising expenses. In fiscal 2002, 2001 and 2000, advertis-
ing allowances exceeded gross advertising expense by $30 mil-
lion, $31 million and $62 million, respectively. These excess
amounts were recorded as a reduction in Cost of Merchandise
Sold in the accompanying Consolidated Statements of Earnings.
SHIPPING AND HANDLING COSTS
The Company accounts for certain shipping and handling
costs related to the shipment of product to customers from
vendors as Cost of Merchandise Sold. However, cost of shipping
and handling to customers by the Company is classified as
Selling and Store Operating Expenses. The cost of shipping
and handling, including internal costs and payments to third
parties, classified as Selling and Store Operating Expenses
was $341 million, $278 million and $226 million in fiscal
years 2002, 2001 and 2000, respectively.
COST IN EXCESS OF THE FAIR VALUE OF NET ASSETS ACQUIRED
Goodwill represents the excess of purchase price over fair
value of net assets acquired. In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 142, “Goodwill
and Other Intangible Assets,” the Company stopped amortiz-
ing goodwill effective February 4, 2002. Amortization expense
was $8 million in both fiscal 2001 and fiscal 2000. The
Company assesses the recoverability of goodwill at least
annually by determining whether the fair value of each report-
ing entity supports its carrying value. The Company completed
its assessment of goodwill for fiscal 2002 and recorded an
impairment charge of $1.3 million.
THE HOME DEPOT, INC. 2002 ANNUAL REPORT 33