Napa Auto Parts 2006 Annual Report Download - page 34

Notes to Consolidated Financial Statements
(continued)
32
1. Summary of Signicant Accounting Policies (continued)
Fair Value of Financial Instruments
The carrying amounts reected in the consolidated balance sheets
for cash and cash equivalents, trade accounts receivable and trade
accounts payable approximate their respective fair values based
on the short-term nature of these instruments. At December 31,
2006 and 2005, the fair market value of xed rate long-term debt
was approximately $511,000,000 and $526,000,000, respectively,
based primarily on quoted prices for these or similar instruments.
The fair value of xed rate long-term debt was estimated by calcu-
lating the present value of anticipated cash ows. The discount rate
used was an estimated borrowing rate for similar debt instruments
with like maturities.
Shipping and Handling Costs
Shipping and handling costs are classied as selling, admin-
istrative and other expenses in the accompanying consolidated
statements of income and totaled approximately $267,000,000,
$238,000,000, and $216,000,000 in the years ended December
31, 2006, 2005, and 2004, respectively.
Advertising Costs
Advertising costs are expensed as incurred and totaled
$49,700,000, $44,100,000, and $41,500,000 in the years
ended December 31, 2006, 2005, and 2004, respectively.
Stock Compensation
The Company maintains various Long-Term Incentive Plans, which
provide for the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units, performance awards,
dividend equivalents and other share-based awards.
Effective January 1, 2003, the Company prospectively adopted
the fair value method of accounting for stock compensation.
The Company recognizes compensation expense based on the
straight-line method. Until January 1, 2003, the Company had
elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (“APB No. 25”), and
related Interpretations in accounting for stock compensation.
Under APB No. 25, no compensation expense was recognized if
the exercise price of stock options equaled or exceeded the market
price of the underlying stock on the date of grant. Pro forma in-
formation regarding net income and earnings per share is required
by SFAS No. 123, as amended, determined as if the Company had
accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair value method of SFAS No. 123.
Effective January 1, 2006 the Company adopted SFAS No. 123(R)
choosing the “modied prospective” method. Compensation cost
recognized for the year ended December 31, 2006 includes: (a)
compensation cost for all share-based payments granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS
No. 123, and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant date fair
value estimated with the provisions of SFAS No. 123(R). Results
for prior periods have not been restated. Most options may be
exercised not earlier than twelve months nor later than ten
years from the date of grant. As of January 1, 2006, there was
approximately $1.2 million of unrecognized compensation cost
for all awards granted prior to January 1, 2003 to employees that
remained unvested prior to the effective date of SFAS No. 123(R).
This compensation cost is expected to be recognized over a
weighted-average period of approximately four years.
Net Income per Common Share
Basic net income per common share is computed by dividing net
income by the weighted average number of common shares out-
standing during the year. The computation of diluted net income
per common share includes the dilutive effect of stock options and
non-vested restricted stock awards. For the years ended December
31, 2005 and 2004, the dilutive effect of options to purchase
approximately 12,000, and 12,000 shares of common stock,
respectively, at an average exercise price of approximately $18 per
share issued in connection with a 1998 acquisition have been
included in the computation of diluted net income per common
share since the date of the acquisition. These shares were exercised
on May 15, 2006 and therefore are included in the basic calculation
for the year ended December 31, 2006.
Recently Issued Accounting Pronouncements
On July 13, 2006, the Financial Accounting Standards Board
(“FASB”) issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of SFAS No. 109
(“FIN No. 48”),
to create a single model to address accounting for uncertainty in tax
positions. FIN No. 48 claries the accounting for income taxes
by prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the nancial statements.
FIN No. 48 also provides guidance on derecognition, measurement,
classication, interest and penalties, accounting in interim periods,
disclosure and transition. FIN No. 48 is effective for scal years
beginning after December 15, 2006. The Company will adopt FIN
No. 48 as of January 1, 2007, as required. While the Company has
not yet completed its analysis, the Company does not expect that
the adoption of FIN No. 48 will have a signicant impact on the
Company’s nancial position and results of operations.
On September 15, 2006, the FASB issued SFAS No. 157, Fair Value
Measurements
(“SFAS No. 157”). SFAS No. 157 denes fair value,
establishes a framework for measuring fair value in accordance
with accounting principles generally accepted in the United States,
and expands disclosures about fair value measurements. SFAS
No. 157 does not expand the use of fair value in any new circum-
stances. SFAS No. 157 is effective for scal years beginning after
November 15, 2007, and interim periods within those scal years.
The Company does not expect SFAS No. 157 will have a signicant
impact on the Company’s consolidated nancial statements.