Pottery Barn 2004 Annual Report Download - page 56

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A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows:
Fiscal Year Ended
Jan. 30, 2005 Feb. 1, 2004 Feb. 2, 2003
Federal income taxes at the statutory rate 35.0% 35.0% 35.0%
State income tax rate, less federal benefit 3.4% 3.5% 3.5%
Total 38.4% 38.5% 38.5%
Significant components of our deferred tax accounts are as follows:
Dollars in thousands Jan. 30, 2005 Feb. 1, 2004
Deferred tax asset (liability)
Current:
Compensation $ 14,667 $ 12,587
Inventory 11,357 10,357
Accrued liabilities 13,725 11,971
Customer deposits 19,342 470
Deferred catalog costs (20,540) (14,871)
Other 464 18
Total current 39,015 20,532
Non-current:
Depreciation (18,634) (3,511)
Deferred rent 8,275 1,151
Deferred lease incentives (11,595) (7,271)
Other 897 744
Total non-current (21,057) (8,887)
Total $ 17,958 $ 11,645
Note E: Accounting for Leases
On February 7, 2005, in a publicly disseminated letter, the Securities and Exchange Commission (the “SEC”)
clarified its position on certain lease accounting issues, including accounting for rent holidays under generally
accepted accounting principles. In response to this clarification, we performed a comprehensive review of our
real property operating leases (including our stores, distribution centers, call centers, and office buildings) and
our related accounting policies. Based on this review, we determined that the only area in which our lease
accounting policies were not consistent with the SEC’s position was in the recognition of rent cost during rent
holidays.
Prior to the publication of the SEC’s letter, we did not recognize rent cost during rent holidays (defined as
periods during which we have control of the premises but are not obligated to pay rent, including build-out
periods). We followed a practice prevalent in the retailing industry in which we recognized rent cost on a
straight-line basis, beginning on the earlier of the operations commencement date or the rent commencement
date. This practice had the effect of excluding the rent holiday from the period over which we recognized rent
cost.
However, because our established accounting policy was to capitalize rent paid during build-out periods, the rent
cost allocated to the rent holiday should have also been capitalized. Accordingly, correcting our accounting for
rent holidays had no impact on our Consolidated Statements of Earnings but did result in a net increase in
property and equipment of approximately $17.4 million and a net increase in deferred rent and lease incentives of
approximately $17.4 million at January 30, 2005.
49
Form 10-K