Home Depot 2006 Annual Report Download - page 51

2005 was the first year in which the Company recognized gift card breakage income, and therefore, the
amount recognized includes the gift card breakage income related to gift cards sold since the inception
of the gift card program. This income is recorded as other income and is included in the accompanying
Consolidated Statements of Earnings as a reduction in Selling, General and Administrative Expenses
(‘‘SG&A’’).
Services Revenue
Net Sales include services revenue generated through a variety of installation, home maintenance and
professional service programs. In these programs, the customer selects and purchases material for a
project and the Company provides or arranges professional installation. These programs are offered
through the Company’s stores and certain HD Supply locations. Under certain programs, when the
Company provides or arranges the installation of a project and the subcontractor provides material as
part of the installation, both the material and labor are included in services revenue. The Company
recognizes this revenue when the service for the customer is complete.
All payments received prior to the completion of services are recorded in Deferred Revenue in the
accompanying Consolidated Balance Sheets. Retail services revenue was $3.8 billion, $3.5 billion and
$3.0 billion for fiscal 2006, 2005 and 2004, respectively.
Self-Insurance
The Company is self-insured for certain losses related to general liability, product liability, automobile,
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.
Prepaid Advertising
Television and radio advertising production costs along with media placement costs are expensed when
the advertisement first appears. Included in Other Current Assets in the accompanying Consolidated
Balance Sheets are $44 million and $42 million, respectively, at the end of fiscal 2006 and 2005 relating
to prepayments of production costs for print and broadcast advertising.
Vendor Allowances
Vendor allowances primarily consist of volume rebates that are earned as a result of attaining certain
purchase levels and advertising co-op allowances for the promotion of vendors’ products that are
typically based on guaranteed minimum amounts with additional amounts being earned for attaining
certain purchase levels. These vendor allowances are accrued as earned, with those allowances received
as a result of attaining certain purchase levels accrued over the incentive period based on estimates of
purchases.
Volume rebates and advertising co-op allowances earned are initially recorded as a reduction in
Merchandise Inventories and a subsequent reduction in Cost of Sales when the related product is sold.
Certain advertising co-op allowances that are reimbursements of specific, incremental and identifiable
costs incurred to promote vendors’ products are recorded as an offset against advertising expense. In
fiscal 2006, 2005 and 2004, net advertising expense was $1.1 billion, $1.1 billion and $1.0 billion,
respectively, which was recorded in SG&A.
Cost of Sales
Cost of Sales includes the actual cost of merchandise sold and services performed, the cost of
transportation of merchandise from vendors to the Company’s stores, locations or customers, the
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