Staples 2005 Annual Report Download - page 96

STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
C-11
NOTE A Summary of Significant Accounting Policies (Continued)
SFAS No. 123R provides two alternatives for adoption: (1) a “modified prospective” method in which compensation
cost is recognized for all awards granted subsequent to the effective date of this statement as well as for the unvested
portion of awards outstanding as of the effective date; or (2) a “modified retrospective” method which follows the
approach in the “modified prospective” method, but also permits entities to restate prior periods to record compensation
cost calculated under SFAS No. 123 for the pro forma disclosure. The Company adopted SFAS No. 123R as of
January 29, 2006 using the modified retrospective method. Since the Company currently accounts for stock options
granted to employees and shares issued under the Company’s employee stock purchase plans in accordance with the
intrinsic value method permitted under APB No. 25, no compensation expense is recognized. The adoption of SFAS
No. 123R is expected to have a significant impact on the Company’s results of operations, although it will have no impact
on its overall financial position. The impact of adopting SFAS No. 123R cannot be accurately estimated at this time, as it
will depend on the market value and the amount of share based awards granted in future periods. However, had the
Company adopted SFAS No. 123R in a prior period, the impact would approximate the impact of SFAS No. 123 as
described in the disclosure of pro forma net income and earnings per share in Note A to the Consolidated Financial
Statements. SFAS No. 123R also requires that tax benefits received in excess of compensation cost be reclassified from
operating cash flows to financing cash flows in the Consolidated Statement of Cash Flows. This change in classification
will reduce net operating cash flows and increase net financing cash flows in the periods after adoption. While the
amount of this change cannot be estimated at this time, the amount of operating cash flows recognized in prior periods
for such excess tax deductions were $36.6 million, $41.2 million and $16.8 million in fiscal 2005, 2004 and 2003,
respectively.
On April 14, 2005, the Securities and Exchange Commission announced that it would delay the required
implementation of SFAS No. 123R, allowing companies that are not small business issuers to adopt the Statement no
later than the beginning of the first fiscal year beginning after June 15, 2005. As a result of this delay, the Company
adopted SFAS No. 123R as of January 29, 2006.
Reclassifications: Certain previously reported amounts have been reclassified to conform with the current period
presentation.
NOTE B Change in Accounting Principle
In November 2002, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 02-16, “Accounting
by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“Issue 02-16”). Issue 02-16
addresses the accounting for vendor consideration received by a customer and is effective for new arrangements, or
modifications of existing arrangements, entered into after December 31, 2002. Under this consensus, there is a
presumption that amounts received from vendors should be considered a reduction of inventory cost unless certain
restrictive conditions are met. Under previous accounting guidance, the Company accounted for all non-performance
based volume rebates as a reduction of inventory cost and all cooperative advertising and other performance based
rebates as a reduction of marketing expense or cost of goods sold, as appropriate, in the period the expense was incurred.
Beginning with contracts entered into in January 2003, the Company adopted a policy to treat all vendor consideration as
a reduction of inventory cost rather than as an offset to the related expense because the administrative cost of tracking
the actual related expenses, to determine whether the Company meets the restrictive conditions required by Issue 02-16,
would exceed the benefit.
To record the impact of including cooperative advertising and other performance based rebates in inventory at the
end of the first quarter of 2003, the Company recorded an aggregate, non-cash adjustment of $98.0 million ($61.7 million
net of taxes) as an increase to cost of goods sold and occupancy costs, or $0.09 per diluted share. This adjustment
reflected all of the Company’s outstanding vendor contracts, as substantially all contracts were either entered into or
amended in the first quarter of 2003. In addition, the new accounting method resulted in reporting $246.6 million of the
Company’s cooperative advertising rebates earned in 2003 as cost of goods sold and occupancy costs, whereas these
amounts would have been reported as a reduction of operating and selling expenses under previous accounting guidance.
In accordance with this consensus, prior periods have not been restated to reclassify amounts recorded as a reduction of
operating and selling expenses to cost of goods sold and occupancy costs.