OfficeMax 2011 Annual Report Download - page 84

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making the assessment of whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Accruals for income tax exposures, including penalties and interest, expected to be settled within the next
year are included in income tax payable with the remainder included in other long-term liabilities in the
Consolidated Balance Sheets. Interest and penalties related to income tax exposures are recognized as incurred
and included in income tax expense in the Consolidated Statements of Operations.
Advertising 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 $225.3 million in 2011, $228.3 million in 2010 and $211.3 million in 2009, and is recorded in operating, selling
and general and administrative expenses in the Consolidated Statements of Operations.
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. The Company recorded approximately $1.0 million and
$1.6 million in pre-opening costs in 2011 and 2009, respectively. No pre-opening costs were recorded in 2010.
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. 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 31, 2011 and December 25, 2010, other long-term liabilities included
approximately $52.3 million and $61.6 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 records all derivative instruments 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 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
instrument is designated as a fair value hedge, changes in the fair value of the instrument are reported in current
earnings and offset the change in fair value of the hedged assets, liabilities or firm commitments. The Company
has no material outstanding derivative instruments at December 31, 2011 and did not have any material hedge
transactions in 2011, 2010 or 2009.
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