Staples 2003 Annual Report Download - page 58

STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Purchase and advertising rebates: We earn rebates from our vendors which are based on various quantitative
contract terms that can be complex and subject to interpretation. Amounts expected to be received from vendors relating
to the purchase of merchandise inventories are recognized as a reduction of cost of goods sold as the merchandise is sold.
Amounts that represent a reimbursement of incremental costs, such as advertising, are recorded as a reduction to the
related expense in the period that the related expense is incurred. Several controls are in place, including direct
confirmation with vendors, that we believe allow us to ensure that these amounts are recorded in accordance with the
terms of the contracts. Should vendors reach different judgments regarding the terms of these contracts, they may seek to
recover amounts from us.
Impairment of Long-Lived Assets: We review our long-lived assets for impairment when indicators of impairment
are present and the undiscounted cash flow estimated to be generated by those assets are less than the assets’ carrying
amount. Our policy is to evaluate long-lived assets for impairment at a store level for retail operations and an operating
unit level for our other operations. Our retail stores typically take three years to achieve their full profit potential. If
actual market conditions are less favorable than management’s projections, future write-offs may be necessary.
Impairment of Goodwill and Indefinite Lived Intangible Assets: As a result of our adoption of Statement of Financial
Accounting Standards No. 142 ‘‘Goodwill and Other Intangible Assets’’ (‘‘SFAS No. 142’’), we now annually review
goodwill and other intangible assets that have indefinite lives for impairment and when events or changes in circum-
stances indicate the carrying value of these assets might exceed their current fair values. We determine fair value using
discounted cash flow analysis, which requires us to make certain assumptions and estimates regarding industry economic
factors and future profitability of acquired businesses. It is our policy to conduct impairment testing based on our most
current business plans, which reflect changes we anticipate in the economy and the industry. If actual results are not
consistent with our assumptions and judgments, we could be exposed to a material impairment charge.
Deferred Taxes: We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. We have considered estimated future taxable income and ongoing tax planning strategies in
assessing the amount needed for the valuation allowance. If actual results differ unfavorably from those estimates used,
we may not be able to realize all or part of our net deferred tax assets and additional valuation allowances may be
required.
New Accounting Pronouncements
In April, 2002, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement No. 145, ‘‘Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections’’. This statement
eliminates extraordinary accounting treatment for a gain or loss reported on the extinguishment of debt and amends
other existing authoritative pronouncements to make technical corrections, clarify meanings, or describe their applicabil-
ity under changed conditions. The provisions of this statement are effective for us with the beginning of fiscal year 2003.
We do not believe the adoption of this statement will have a material impact on our overall financial position or results of
operations.
In June, 2002, the FASB issued Statement No. 146, ‘‘Accounting for Costs Associated with Exit or Disposal
Activities’’ (‘‘SFAS No. 146’’). This statement requires that the fair value of a liability associated with an exit or disposal
activity be recognized when the liability is incurred. Prior to the adoption of SFAS No. 146, certain exit costs were
recognized when we committed to a restructuring plan, which may have been before the liability was incurred. We
adopted the provisions of this statement in December, 2002. The adoption of SFAS No. 146 had no impact on our
financial position or results of operations.
In December, 2002, the FASB issued Statement No. 148, ‘‘Accounting for Stock-Based Compensation—Transition
and Disclosure’’ (‘‘SFAS No. 148’’). SFAS No. 148 presents additional alternatives for transitioning to the fair value
method of accounting for stock-based compensation, prescribes the format to be used for pro forma disclosures and
requires the inclusion of similar pro forma disclosures in interim financial statements. The provisions of SFAS No. 148
are effective for us in fiscal 2003. We have not yet determined the impact the adoption of this statement will have on our
financial position or results of operations.
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