OfficeMax 2008 Annual Report Download - page 58

penalties related to income tax exposures are recognized as incurred and included in income tax
expense in the Consolidated Statements of Income (Loss).
Advertising and Catalog Costs
Advertising costs are either expensed the first time the advertising takes place or, in the case of
direct-response advertising, capitalized and charged to expense in the periods in which the related
sales occur. Advertising expense was $232.1 million in 2008, $242.6 million in 2007 and
$240.4 million in 2006, and is recorded in operating and selling expenses in the Consolidated
Statements of Income (Loss). Capitalized catalog costs, which are included in other current assets
in the Consolidated Balance Sheets, totaled $10.4 million at December 27, 2008, and $7.6 million at
December 29, 2007.
Pre-Opening Expenses
The Company incurs certain non-capital expenses prior to the opening of a store. These
pre-opening expenses consist primarily of straight-line rent from the date of possession, store
payroll, and supplies and are expensed as incurred and reflected in operating and selling
expenses. In 2008, 2007 and 2006, the Company recorded approximately $10.0 million,
$10.2 million and $5.6 million in pre-opening costs, respectively.
Leasing Arrangements
The Company conducts a substantial portion of its business in leased properties. Some of the
Company’s leases contain escalation clauses and renewal options. In accordance with SFAS
No. 13, ‘‘Accounting for Leases,’’ as amended by SFAS No. 29, ‘‘Determining Contingent Rentals,’’
and Financial Accounting Standards Board (FASB) Technical Bulletin 85-3, ‘‘Accounting for
Operating Leases with Scheduled Rent Increases,’’ the Company recognizes rental expense for
leases that contain predetermined fixed escalation clauses on a straight-line basis over the
expected term of the lease. The difference between the amounts charged to expense and the
contractual minimum lease payment is recorded in other long-term liabilities in the Consolidated
Balance Sheets. At December 27, 2008 and December 29, 2007, other long-term liabilities included
approximately $74.3 million and $73.7 million, respectively, related to these future escalation
clauses.
The expected term of a lease is calculated from the date the Company first takes possession of
the facility, including any periods of free rent and any option or renewal periods management
believes are probable of exercise. This expected term is used in the determination of whether a
lease is capital or operating and in the calculation of straight-line rent expense. Rent abatements
and escalations are considered in the calculation of minimum lease payments in the Company’s
capital lease tests and in determining straight-line rent expense for operating leases. Straight-line
rent expense is also adjusted to reflect any allowances or reimbursements provided by the lessor.
Derivative Instruments and Hedging Activities
The Company accounts for derivatives and hedging activities in accordance with SFAS
No. 133, ‘‘Accounting for Derivative Instruments and Certain Hedging Activities,’’ as amended,
which requires that all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivative instruments are recorded in current earnings or deferred in
accumulated other comprehensive income (loss), depending on whether a derivative is designated
as, and is effective as, a hedge and on the type of hedging transaction. Changes in fair value of
derivatives that are designated as cash flow hedges are deferred in accumulated other
comprehensive income (loss) until the underlying hedged transactions are recognized in earnings,
at which time any deferred hedging gains or losses are also recorded in earnings. If a derivative
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