Staples 2004 Annual Report Download - page 100

STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE A Summary of Significant Accounting Policies (Continued)
accounts payable approximate fair value because of their short-term nature, and the carrying amounts of Staples’ debt
approximates fair value because of the Company’s use of derivative instruments that qualify for hedge accounting.
Revenue Recognition: Revenue is recognized at the point of sale for the Company’s retail operations and at the
time of shipment for its delivery sales. We offer our customers various coupons, discounts and rebates, which are treated
as a reduction of revenue.
Sales of extended service plans are either administered by an unrelated third party or by the Company. The
unrelated third party is the legal obligor in most of the areas they administer and accordingly bears all performance
obligations and risk of loss related to the service plans sold in such areas. In these areas, Staples recognizes a net
commission revenue at the time of sale for the service plans. In certain areas where Staples is the legal obligor, the
revenues associated with the sale are deferred and recognized over the life of the service contract, which is typically one
to five years.
Cost of Goods Sold and Occupancy Costs: Cost of goods sold and occupancy costs includes the costs of
merchandise sold, inbound and outbound freight, receiving and distribution, and store and distribution center occupancy
(including real estate taxes and common area maintenance).
Shipping and Handling Costs: All shipping and handling costs are included as a component of cost of goods sold
and occupancy costs.
Operating and Selling Expenses: Operating and selling expenses include payroll, advertising and other operating
expenses for our stores and delivery operations not included in cost of goods sold and occupancy costs.
Advertising: Staples expenses the production costs of advertising the first time the advertising takes place, except
for the cost of direct-response advertising, primarily catalog production costs, which are capitalized and amortized over
their expected period of future benefits (i.e., the life of the catalog). Direct catalog production costs included in prepaid
and other assets totaled $30.8 million at January 29, 2005 and $29.6 million at January 31, 2004. Total advertising and
marketing expense was $526.0 million, $492.7 million and $559.8 million ($444.2 million on a pro forma basis to reflect
Issue 03-10) for fiscal years 2004, 2003 and 2002, respectively.
Pre-opening Costs: Pre-opening costs, which consist primarily of salaries, supplies, marketing and distribution costs,
are expensed as incurred.
Stock Option Plans: Staples accounts for its stock-based plans under Accounting Principles Board Opinion No. 25,
‘‘Accounting for Stock Issued to Employees’’ (‘‘APB No. 25’’) and provides pro forma disclosures of the compensation
expense determined under the fair value provisions of SFAS No. 123, ‘‘Accounting for Stock-Based Compensation’’
(‘‘SFAS No. 123’’) as amended by SFAS No. 148 ‘‘Accounting for Stock-Based Compensation—Transition and Disclo-
sure’’ (‘‘SFAS No. 148’’). Under APB No. 25, since the exercise price of Staples’ employee stock options equals the
market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by SFAS No. 148, which also
requires that the information be determined as if Staples had accounted for its employee stock options granted
subsequent to January 28, 1995 under the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average
assumptions:
2004 2003 2002
Risk free interest rate ............................................. 3.8% 2.6% 3.1%
Expected dividend yield ........................................... 0.7% 0% 0%
Expected stock volatility ........................................... 41% 43% 45%
Expected life of options ........................................... 5.0 years 5.0 years 5.0 years
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