Home Depot 2003 Annual Report Download - page 31

The Home Depot, Inc. | 29
Notes to Consolidated Financial Statements
The Home Depot, Inc. and Subsidiaries
Impairment of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets
when management makes the decision to relocate or close a
store, or when circumstances indicate the carrying amount of an
asset may not be recoverable. Losses related to the impairment of
long-lived assets are recognized to the extent the sum of undis-
counted estimated future cash flows expected to result from the
use of the asset are less than the asset’s carrying value. If
the carrying value is greater than the future cash flows, a provi-
sion is made to write down the related assets to the estimated net
recoverable value. Impairment losses were recorded as a compo-
nent of Selling and Store Operating Expenses in the accompanying
Consolidated Statements of Earnings.
In August 2002, the Company adopted SFAS No. 146, “Accounting
for Costs Associated with Exit or Disposal Activities”
(“SFAS 146”). In accordance with SFAS 146, the Company
recognizes Selling and Store Operating Expense for the net present
value of future lease obligations, less estimated sublease income
when a location closes. Prior to the adoption of SFAS 146, the
Company recognized this Selling and Store Operating Expense
when the Company committed to a plan to relocate or close
a location.
Stock-Based Compensation
Effective February 3, 2003, the Company adopted the fair value
method of recording stock-based compensation expense in accor-
dance with SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). The Company selected the
prospective method of adoption as described in SFAS No. 148,
“Accounting for Stock-Based Compensation-Transition and
Disclosure” and accordingly stock-based compensation expense
was recognized related to stock options granted, modified or set-
tled and expense related to the Employee Stock Purchase Plan
(“ESPP”) after the beginning of fiscal 2003. The fair value of stock
options and ESPP as determined on the date of grant using
the Black-Scholes option-pricing model is being expensed
over the vesting period of the related stock options and ESPP.
As such, the Company recognized $40 million of stock-based
compensation expense in fiscal 2003.
Prior to February 3, 2003, the Company elected to account for its
stock-based compensation plans under Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), which requires the recording of stock-
based compensation expense for some, but not all, stock-based
compensation. Pursuant to APB 25, no stock-based compensation
expense related to stock option awards and ESPP was recorded in
fiscal 2002 and 2001.
The per share weighted average fair value of stock options granted
during fiscal 2003, 2002 and 2001 was $9.79, $17.34 and $20.51,
respectively. The fair value of these options was determined at
the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
Fiscal Year Ended
February 1,February 2, February 3,
2004 2003 2002
Risk-free interest rate 3.0% 4.0% 5.1%
Assumed volatility 44.6% 44.3% 48.1%
Assumed dividend yield 1.0% 0.5% 0.4%
Assumed lives of options 5 years 5years 6years
The following table illustrates the effect on Net Earnings and
Earnings per Share as if the Company had applied the fair value
recognition provisions of SFAS 123 to all stock-based compensa-
tion in each period (amounts in millions, except per share data):
Fiscal Year Ended
February 1,February 2, February 3,
2004 2003 2002
Net Earnings, as reported $4,304 $3,664 $3,044
Add: Stock-based
compensation expense
included in reported
Net Earnings, net of
related tax effects 42 10 13
Deduct: Total stock-based
compensation expense
determined under fair
value based method
for all awards, net of
related tax effects (279) (260) (257)
Pro forma net earnings $4,067 $3,414 $2,800
Earnings per Share:
Basic – as reported $ 1.88 $ 1.57 $ 1.30
Basic – pro forma $ 1.78 $ 1.46 $ 1.20
Diluted – as reported $ 1.88 $ 1.56 $ 1.29
Diluted – pro forma $ 1.78 $ 1.46 $ 1.19