Home Depot 2014 Annual Report Download - page 44

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this revenue upon the redemption of gift cards in Net Sales. Gift card breakage income is recognized based upon historical
redemption patterns and represents the balance of gift cards for which the Company believes the likelihood of redemption by
the customer is remote. During fiscal 2014, 2013 and 2012, the Company recognized $32 million, $30 million and $33
million, respectively, of gift card breakage income. This income is included in the accompanying Consolidated Statements of
Earnings as a reduction in 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 in-home sales programs.
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. Services revenue was $3.8 billion, $3.5 billion and $3.2 billion for fiscal 2014, 2013 and 2012,
respectively.
Self-Insurance
The Company is self-insured for certain losses related to general liability (including product liability), workers’
compensation, employee group medical and automobile 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. The Company maintains network security and privacy liability
insurance coverage to limit the Company's exposure to losses such as those that may be caused by a significant compromise
or breach of the Company's data security. This coverage is discussed further in Note 13.
Prepaid Advertising
Television and radio advertising production costs, along with media placement costs, are expensed when the advertisement
first appears. Amounts included in Other Current Assets in the accompanying Consolidated Balance Sheets relating to
prepayments of production costs for print and broadcast advertising as well as sponsorship promotions were not material at
the end of fiscal 2014 and 2013.
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 certain 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 2014, 2013 and 2012, gross advertising expense was $884 million,
$865 million and $831 million, respectively, and is included in SG&A. Specific, incremental and identifiable advertising co-
op allowances were $125 million, $114 million and $85 million for fiscal 2014, 2013 and 2012, respectively, and are
recorded as an offset to advertising expense 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 operating cost of the Company’s sourcing and distribution
network 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 $443 million, $410 million and $394 million in fiscal 2014, 2013 and 2012, respectively.