Redbox 2007 Annual Report Download - page 27

machines and our DVD kiosk locations over the next 12 to 18 months. In conjunction with the expansion, we will be
removing approximately 50% of our cranes, bulk heads, and kiddie rides from our existing Wal-Mart locations. This
decision, along with other contract terminations or decisions to scale-back the number of entertainment machines
with other retail partners as well as macro-economic trends negatively affecting the entertainment service industry,
resulted in excess equipment and inventory. As a result, we recorded a non-cash impairment charge of $65.2 million
related to an asset group that includes this equipment and certain intangible assets. Of this amount, $52.6 million
relates to the impairment of these cranes, bulk heads and kiddie rides, $7.9 million relates to the impairment of
intangible assets and $4.7 million relates to the write-off of inventory. We estimated the fair values of these assets
using discounted cash flows, or liquidation value for certain assets, which we considered an appropriate method in
the circumstance.
Income taxes: Deferred income taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of our assets and liabilities and operating loss and tax credit carryforwards. A
valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be
realized. Deferred tax assets and liabilities and operating loss and tax credit carryforwards are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences and
operating loss and tax credit carryforwards are expected to be recovered or settled.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109, Accounting
for Income Taxes (“SFAS 109”) which provides comprehensive guidance on the recognition and measurement of
tax positions in previously filed tax returns or positions expected to be taken in future tax returns. The tax benefit
from an uncertain tax position must meet a “more-likely-than-not” recognition threshold and is measured at the
largest amount of benefit greater than 50% determined by cumulative probability of being realized upon ultimate
settlement with the taxing authority. The interpretation provides guidance on derecognition, classification, interest
and penalties, as well as disclosure requirements in the financial statements of uncertain tax positions.
As of the adoption date and as of December 31, 2007 we identified $1.2 million of unrecognized tax benefits
which would affect our effective tax rate if recognized.
In accordance with our accounting policy, we recognize interest and penalties associated with uncertain tax
positions in income tax expense. As of the adoption date and December 31, 2007, it was not necessary to accrue
interest and penalties associated with the uncertain tax positions identified.
Cash in machine or in transit and cash being processed: Cash in machine or in transit represents coin
residing or estimated in our coin-counting or entertainment machines, cash being processed by carriers, cash in our
cash registers and cash deposits in transit. Cash being processed represents cash which we are obligated to use to
settle our accrued liabilities payable to retailers.
Stock-based compensation: Effective January 1, 2006, we adopted the fair value recognition provisions of
FASB Statement No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”) using the modified-prospective
transition method. Under this transition method, compensation expense recognized includes the estimated fair value
of stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R, and the estimated fair value of the portion vesting in the period for
options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.In
accordance with the modified-prospective transition method, results for prior periods have not been restated.
Recent Accounting Pronouncements
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measures (“SFAS 157”), which
defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value
measures required under other accounting pronouncements, but does not change existing guidance as to whether or
not an instrument is carried at fair value. The effective date of SFAS 157 for nonfinancial assets and liabilities has
been delayed by one year to fiscal years beginning after November 15, 2008. We are currently reviewing the
provisions of SFAS 157 to determine the impact to our Consolidated Financial Statements.
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