Pep Boys 2007 Annual Report Download - page 88

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended February 2, 2008, February 3, 2007 and January 28, 2006
(dollar amounts in thousands, except share data)
LEASES The Company’s policy is to amortize leasehold improvements over the lesser of the
lease term or the economic life of those assets. Generally, for the stores the lease term is the base
lease term and for distribution centers the lease term includes the base lease term plus certain renewal
option periods for which renewal is reasonably assured and for which failure to exercise the renewal
option would result in an economic penalty. The calculation for straight-line rent expense is based on
the same lease term with consideration for step rent provisions, escalation clauses, rent holidays and
other lease concessions. The Company expenses rent during the construction or build-out phase of the
lease.
SERVICE REVENUE Service revenue consists of the labor charge for installing merchandise or
maintaining or repairing vehicles, excluding the sale of any installed parts or materials.
COSTS OF REVENUES Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include service center payroll and
related employee benefits, service center occupancy costs and cost of providing free or discounted
towing services to our customers. Occupancy costs include utilities, rents, real estate and property taxes,
repairs and maintenance and depreciation and amortization expenses.
PENSION AND RETIREMENT PLANS The Company reports all information on its pension and
savings plan benefits in accordance with FASB Statement of Financial Accounting Standards (SFAS)
No. 87, ‘‘Employers’ Accounting for Pensions’’ and SFAS No. 88, ‘‘Employers’ Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits’’, as
amended by SFAS No. 132, ‘‘Employers’ Disclosure about Pensions and Other Postretirement Benefits-
an Amendment of FASB Statements No. 87, 88 and 106 (revised 2003)’’ (SFAS 132R), as amended 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 asset and liability method of accounting for income
taxes in accordance with SFAS No. 109, ‘‘Accounting for Income Taxes.’’ Under this 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.
The accounting for our tax reserves changed with the adoption of FIN 48, ‘‘Accounting for
Uncertainty in Income Taxes’’, or FIN 48, on February 4, 2007. Refer to Note 14 for further discussion
of the impact of adopting FIN 48 and change in unrecognized tax benefit during fiscal 2007.
In evaluating our income tax positions, we record reserves for potential exposures. These tax
reserves are adjusted in the period actual developments give rise to such change. Those developments
could be, but are not limited to; settlement of tax audits, expiration of the statute of limitations, and
the evolution of tax code and regulations, along with varying application of tax policy and
administration within those jurisdictions.
The temporary differences between the book and tax treatment of income and expenses result in
deferred tax assets and liabilities, which are included within the Company’s consolidated balance sheets.
The Company must then assess the likelihood that deferred tax assets will be recovered from future
taxable income. To the extent the Company believes that recovery is not more likely than not, the
Company must establish a valuation allowance. In this regard when determining whether or not we
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