Sears 2006 Annual Report Download - page 65

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
earned from co-branded credit card programs. The Company recognizes revenues from retail operations at the
later of the point of sale or the delivery of goods to the customer. Direct to customer revenues are recognized
when the merchandise is delivered to the customer. Revenues from product installation and repair services are
recognized at the time the services are provided. Revenues from the sale of service contracts are deferred and
amortized over the lives of the associated contracts, while the associated service costs are expensed as incurred.
The Company earns revenues through arrangements with third-party financial institutions that manage and
directly extend credit relative to the Company’s co-branded credit card programs. The third-party financial
institutions pay the Company for generating new accounts and sales activity on co-branded cards, as well as for
selling other financial products to cardholders. The Company recognizes these revenues in the period earned,
which is when all related Company performance obligations have been met. The Company sells gift cards to
customers at its retails stores and through its direct to customer operations. The gift cards generally do not have
expiration dates. Revenues from gift cards are recognized when (i) the gift card is redeemed by the customer, or
(ii) the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and the
Company determines that it does not have legal obligation to remit the value of the unredeemed gift cards to the
relevant jurisdictions.
Revenues from merchandise sales and services are reported net of estimated returns and allowances and
exclude sales taxes. The reserve for returns and allowances is calculated as a percentage of sales based on
historical return percentages. Estimated returns are recorded as a reduction of sales and cost of sales. The
Company defers the recognition of layaway sales and profit until the period in which the merchandise is
delivered to the customer.
Cost of Sales, Buying and Occupancy Costs
Cost of sales, buying and occupancy are comprised principally of the costs of merchandise, buying,
warehousing and distribution (including receiving and store delivery costs), retail store occupancy costs, product
repair and home service and installation costs, customer shipping and handling costs, vendor allowances,
markdowns and physical inventory losses.
Selling and Administrative Expenses
Selling and administrative expenses are comprised principally of payroll and benefits costs for retail and
corporate employees, occupancy costs of corporate facilities, advertising, pre-opening costs and other
administrative expenses.
Pre-Opening Costs
Pre-opening and start-up activity costs are expensed in the period in which they occur.
Advertising Costs
Advertising costs are expensed as incurred, generally the first time the advertising occurs, and amounted to
$2.2 billion, $2.0 billion, and $446 million for fiscal 2006, fiscal 2005, and fiscal 2004, respectively. These costs
are included within selling and administrative expenses in the accompanying consolidated statements of income.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109. Accordingly, the Company
provides deferred income tax assets and liabilities based on the estimated future tax effects of differences
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