Pep Boys 2006 Annual Report Download - page 78

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended February 3, 2007, January 28, 2006 and January 29, 2005
(dollar amounts in thousands, except share data)
39
by SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-
an Amendment of FASB Statements No. 87, 88, 106 and 132(R)”.
INCOME TAXES The Company uses the liability method of accounting for income taxes in
accordance with SFAS No. 109, “Accounting for Income Taxes.” Under the liability method, deferred
income taxes are determined based upon enacted tax laws and rates applied to the differences between the
financial statement and tax bases of assets and liabilities.
ADVERTISING The Company expenses the production costs of advertising the first time the
advertising takes place. Gross advertising expense for 2006, 2005, and 2004 was $84,206, $85,809 and
$73,996, respectively. No advertising costs were recorded as assets as of February 3, 2007 or
January 28, 2006.
The Company restructured substantially all of its vendor agreements in the fourth quarter of fiscal
2005 to provide flexibility in how the Company can use vendor support funds, and eliminate the
administrative burden associated with tracking the application of such funds. Therefore, in fiscal 2006,
substantially all vendor support funds were treated as a reduction of inventories and recognized as a
reduction to cost of merchandise sales as inventories are subsequently sold.
Prior to fiscal year 2006, certain cooperative advertising reimbursements were netted against specific,
incremental, identifiable costs incurred in connection with the selling of the vendor’s product. Cooperative
advertising reimbursements of $35,702 and $36,579 for fiscal years 2005 and 2004, respectively, were
recorded as a reduction of advertising expense with the net amount included in selling, general and
administrative expenses in the consolidated statement of operations. Any excess reimbursements over
these costs are characterized as a reduction of inventory and are recognized as a reduction of cost of sales
as the inventories are sold, in accordance with EITF 02-16. The amount of excess reimbursements
recognized as a reduction of costs of sales were $53,753 and $48,950 for fiscal years 2005 and 2004,
respectively. The balance of excess reimbursements remaining in inventory was immaterial as of
January 28, 2006.
STORE OPENING COSTS The costs of opening new stores are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impaired long-lived assets
in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
This standard prescribes the method for asset impairment evaluation for long-lived assets and certain
identifiable intangibles that are both held and used or to be disposed of. The Company evaluates the ability
to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset
may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying
value exceeds the fair value. In addition, the Company reports assets to be disposed of at the lower of the
carrying amount or the fair market value less selling costs.
During fiscal 2006, the Company recorded an $840 impairment charge principally related for one
store location.
In the fourth quarter of fiscal 2005, the Company recorded in selling, general and administrative
expenses an impairment charge of $4,200 reflecting the remaining value of a commercial sales software
asset.
EARNINGS PER SHARE Earnings per share for all periods have been computed in accordance
with SFAS No. 128, “Earnings Per Share” as amended by SFAS No. 123 (revised 2004), “Share-Based