Circuit City 2004 Annual Report Download - page 47

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50
As Previously
-------------
provisions of SFAS 123R effective as of the beginning of its first quarter in 2006. SFAS 123R provides
alternative methods of adoption which include prospective application and a modified retroactive application.
The Company is evaluating the available alternatives of adoption of SFAS 123R. The Company believes the
adoption of SFAS 123R will have a financial statement impact which could be significant.
In December 2004, the FASB issued FASB Staff Position (FSP) 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004." FSP 109-1 states that qualified domestic production activities should be
accounted for as a special deduction under SFAS 109, "Accounting for Income Taxes," and not be treated as a
rate reduction. Accordingly, any benefit from the deduction should be reported in the period in which the
deduction is claimed on the tax return. The Company is currently evaluating the effect that the deduction will
have, if any, in subsequent years.
In December 2004, the FASB also issued FSP 109-2, "Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation Act of 2004." FSP 109-2 provides guidance
under SFAS 109 with respect to recording the potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004 ("Jobs Act"). FSP 109-2 temporarily allows companies that are evaluating whether to
repatriate foreign earnings under the Jobs Act to delay recognizing any related taxes until that decision is made.
This pronouncement also requires companies that are considering repatriating earnings to disclose the status of
their evaluation and the potential amounts being considered for repatriation. The Company has completed its
evaluation of this legislation and FSP 109
-
2 and will not repatriate any foreign earnings.
2.
RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial statements in its Form 10-K for the year
ended December 31, 2004, the Company discovered errors related to accounting for inventory at its Tiger Direct,
Inc. subsidiary. These errors had the effect of misstating the value of inventory and certain vendor-related
liabilities as of December 31, 2004 and overstating net income for the year ended December 31, 2004. Such
errors did not have any impact on the consolidated financial statements for any previous years. For the year ended
December 31, 2004, an error was also corrected in the presentation of the Consolidated Statement of Cash Flows
related to activity in the allowances for doubtful accounts and subsequent customer returns. The restatement
affected cash flows provided by operations but did not affect previously reported net cash flows for the restated
period or future periods.
The Company restated its presentation of long-term debt to classify its entire United Kingdom term loan payable
as of December 31, 2004 as current, as it was not in compliance with the financial covenants
–
see Note 7(b).
The restated results also include changes resulting from a correction in the application of the Company's revenue
recognition policy. The Company determined during its internal review of 2004 results that a change in its
revenue recognition policy for sales of product was required in order to comply with Staff Accounting Bulletin
No. 104 "Revenue Recognition " ("SAB 104"), as interpreted by the SEC Staff. Based on the Company's
practices with respect to its terms of shipment, revenue that had been recognized at time of shipment based upon
FOB shipping point terms should have been recognized at time of receipt by customers, when title and risk of
loss both transferred. The effect of this change resulted in a restatement of the results of operations for the three
years presented and the balance sheets as of December 31, 2004 and 2003. Opening retained earnings as of
January 1, 2002 was reduced by $1,849,000.
As a result, the accompanying financial statements for the years ended December 31, 2004 and 2003 have been
restated from the amounts previously reported to properly reflect these items. A summary of the significant
effects of the restatement is as follows (in thousands, except per share data):