Home Depot 2006 Annual Report Download - page 52

operating cost of the Company’s distribution centers and the cost of deferred interest programs offered
through the Company’s private label credit card program.
The cost of handling and shipping merchandise from the Company’s stores, locations or distribution
centers to the customer is classified as SG&A. The cost of shipping and handling, including internal
costs and payments to third parties, classified as SG&A was $741 million, $563 million and $499 million
in fiscal 2006, 2005 and 2004, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired. The
Company does not amortize goodwill, but does assess the recoverability of goodwill in the third quarter
of each fiscal year by determining whether the fair value of each reporting unit supports its carrying
value. The fair values of the Company’s identified reporting units were estimated using the expected
present value of discounted cash flows.
The Company amortizes the cost of other intangible assets over their estimated useful lives, which
range from 1 to 14 years, unless such lives are deemed indefinite. Intangible assets with indefinite lives
are tested in the third quarter of each fiscal year for impairment. The Company recorded no
impairment charges for fiscal 2006, 2005 or 2004.
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 other location, 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 undiscounted 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 provision is made to write down the related assets to the estimated net recoverable value. Impairment
losses were recorded as a component of SG&A in the accompanying Consolidated Statements of
Earnings. When a location closes, the Company also recognizes in SG&A the net present value of
future lease obligations, less estimated sublease income.
In fiscal 2005, the Company recorded $91 million in SG&A related to asset impairment charges and
on-going lease obligations associated with the closing of 20 of its EXPO stores. Additionally, the
Company recorded $29 million of expense in Cost of Sales in fiscal 2005 related to inventory
markdowns in these stores. The Company also recorded impairments on other closings and relocations
in the ordinary course of business, which were not material to the Consolidated Financial Statements of
the Company in fiscal 2006, 2005 and 2004.
Stock-Based Compensation
Effective February 3, 2003, the Company adopted the fair value method of recording stock-based
compensation expense in accordance with Statement of Financial Accounting Standards (‘‘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 for stock options granted, modified or settled and expense related to the Employee Stock
Purchase Plan (‘‘ESPP’’) after the beginning of fiscal 2003. Effective January 30, 2006, the Company
adopted the fair value recognition provisions of SFAS No. 123(R), ‘‘Share-Based Payment’’
(‘‘SFAS 123(R)’’), using the modified prospective transition method. Under the modified prospective
transition method, the Company began expensing unvested options granted prior to fiscal 2003 in
addition to continuing to recognize stock-based compensation expense for all share-based payments
awarded since the adoption of SFAS 123 in fiscal 2003. During fiscal 2006, the Company recognized
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