Home Depot 2005 Annual Report Download - page 39

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allowance as we were able to recognize previous capital losses for which no tax benefit had been
recorded at the time the capital loss was incurred.
Diluted Earnings per Share
Diluted Earnings per Share were $2.26 and $1.88 for fiscal 2004 and fiscal 2003, respectively. The
adoption of EITF 02-16 negatively impacted Diluted Earnings per Share for fiscal 2004 by $0.04 per
share. Diluted Earnings per Share were favorably impacted in fiscal 2004 as a result of the repurchase
of shares of our common stock in fiscal 2003 and fiscal 2004.
Impact of the Adoption of EITF 02-16
In fiscal 2003, we adopted EITF 02-16 which states that certain cash consideration received from a
vendor is presumed to be a reduction of the prices of the vendor’s products or services and should,
therefore, be recorded as a reduction of Cost of Sales when recognized in our Consolidated Statements
of Earnings. That presumption is overcome when the consideration is either a reimbursement of
specific, incremental and identifiable costs incurred to sell the vendor’s products or a payment for
assets or services delivered to the vendor. We receive consideration in the form of advertising co-op
allowances from our vendors pursuant to annual agreements, which are generally on a calendar year
basis. As permitted by EITF 02-16, we elected to apply its provisions prospectively to all agreements
entered into or modified after December 31, 2002. Therefore, the impact of us adopting EITF 02-16 in
fiscal 2003 was limited to advertising co-op allowances earned pursuant to vendor agreements entered
into in late 2003, which became effective in January 2004.
The one-month impact of the adoption of EITF 02-16 in fiscal 2003 resulted in a reduction of Cost of
Sales of $40 million, an increase in SG&A of $47 million and a reduction of Earnings before Provision
for Income Taxes of $7 million. The impact on our Diluted Earnings per Share was immaterial.
The impact of the adoption of EITF 02-16 in fiscal 2004 resulted in a reduction of Cost of Sales of
$891 million, an increase in SG&A of $1.0 billion and a reduction of Earnings before Provision for
Income Taxes of $158 million. The impact on our Diluted Earnings per Share for fiscal 2004 was a
reduction of $0.04 per share.
EITF 02-16 did not have a material impact on our fiscal 2005 consolidated results of operations or
financial condition as of January 29, 2006.
Prior to the adoption of EITF 02-16 in fiscal 2003, the entire amount of advertising co-op allowances
received was offset against advertising expense and resulted in a reduction of SG&A. We continue to
earn certain advertising co-op allowances that are recorded as an offset against advertising expenses as
they are reimbursements of specific, incremental and identifiable costs incurred to promote vendors’
products. In fiscal 2005, 2004 and 2003, net advertising expense was $1.1 billion, $1.0 billion and
$58 million, respectively, which was recorded in SG&A.
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