Home Depot 2003 Annual Report Download - page 23

The Home Depot, Inc. | 21
Management’s Discussion and Analysis of
Results of Operations and Financial Condition (continued)
The Home Depot, Inc. and Subsidiaries
SFAS 149 was effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS 149 did not have any
impact on our Consolidated Financial Statements.
In December 2003, the FASB issued a revision of Interpretation
No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”).
FIN 46 requires consolidation of a variable interest entity if a
company’s variable interest absorbs a majority of the entity’s
losses or receives a majority of the entity’s expected residual
returns, or both. We are subject to apply the provisions of FIN 46
no later than the end of the first reporting period that ends after
March 15, 2004 and therefore, we will adopt FIN 46 in the first
quarter of 2004.
We lease assets totaling $282 million under an off-balance sheet
operating lease agreement that was created under a structured
financing arrangement involving two special purpose entities.
We financed a portion of our new stores, as well as, a distribution
center and two office buildings under this agreement. In accor-
dance with FIN 46, we will be required to consolidate one of the
special purpose entities that, before the effective date of FIN 46,
met the requirements for non-consolidation. The second special
purpose entity that owns the aforementioned assets is not owned
by or affiliated with us, our management or our officers, and
pursuant to FIN 46, we are not deemed to have a variable interest
so therefore, are not required to consolidate this entity.
FIN 46 requires us to measure the assets and liabilities at their
carrying amounts, which amounts would have been recorded if
FIN 46 had been effective at the inception of the transaction.
Accordingly, during the first quarter of 2004, we will record Long-
Term Debt of $282 million and Notes Receivable of $282 million
on our Consolidated Balance Sheets. If we had consolidated these
entities as of the end of fiscal 2003, our total debt-to-equity ratio
would have increased from 6.1% to 7.4%. We will also record the
related Interest Expense and Interest Income on the Long-Term
Debt and Notes Receivable, respectively, which amounts will offset
with no resulting net impact to our Net Earnings. We will continue
to record the rental payments under the operating lease agree-
ment as Selling and Store Operating Expenses in our Consolidated
Statements of Earnings. Although FIN 46 requires a change in
our accounting principles governing consolidation, there is no
economic impact on us.