Circuit City 2005 Annual Report Download - page 28

regarding such cash flows could materially affect our evaluations
Income Taxes.
We are subject to taxation from federal, state and foreign jurisdictions and the determination of our tax
provision is complex and requires significant management judgment. Management judgment is also applied in the
determination of deferred tax assets and liabilities and any valuation allowances that might be required in connection
with our ability to realize deferred tax assets.
Since we conduct operations internationally, our effective tax rate has and will continue to depend upon the geographic
distribution of our pre-tax income or losses among locations with varying tax rates and rules. As the geographic mix of
our pre-tax results among various tax jurisdictions changes, the effective tax rate may vary from period to period. We
are also subject to periodic examination from domestic and foreign tax authorities regarding the amount of taxes due.
These examinations include questions regarding the timing and amount of deductions and the allocation of income
among various tax jurisdictions. We have established, and periodically reevaluate, an estimated income tax reserve on
our consolidated balance sheet to provide for the possibility of adverse outcomes in income tax proceedings. While
management believes that we have identified all reasonably identifiable exposures and that the reserve we have
established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures
exist and that exposures may be settled at amounts different than the amounts reserved.
We account for income taxes in accordance with Statement of Financial Accounting Standards 109, “Accounting for
Income Taxes,” which requires that deferred tax assets and liabilities be recognized for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities. The realization of net deferred tax assets
is dependent upon our ability to generate sufficient future taxable income. Where it is more likely than not that some
portion or all of the deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of
those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would
increase net income in the period such determination is made. In the event that actual results differ from these estimates
or we adjust these estimates in future periods, an adjustment to the valuation allowance may be required, which could
materially affect our consolidated financial position and results of operations.
Restructuring charges.
We have taken restructuring actions, and may commence further restructuring activities which
result in recognition of restructuring charges. These actions require management to make judgments and utilize
significant estimates regarding the nature, timing and amounts of costs associated with the activity. When we incur a
liability related to a restructuring action, we estimate and record all appropriate expenses, including expenses for
severance and other employee separation costs, facility consolidation costs (including estimates of sublease income),
lease cancellations, asset impairments and any other exit costs. Should the actual amounts differ from our estimates, the
amount of the restructuring charges could be impacted, which could materially affect our consolidated financial
position and results of operations.
Recent Accounting Developments
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.”
SFAS 151 clarifies
that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials
(spoilage) are required to be recognized as current period charges. SFAS 151 also requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the production facility. The
provisions of SFAS 151 will be effective for fiscal years beginning after June 15, 2005 and is required to be adopted by
the Company in the first quarter of fiscal 2006. The Company does not expect that the adoption will have a material
impact on the Company’s consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS 123 (revised 2004) (SFAS 123R), “Share-Based Payment.” SFAS
123R replaced SFAS 123, “Accounting for Stock-Based Compensation,” and superseded Accounting Principles Board
Opinion 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires the recognition of compensation cost
relating to share-based payment transactions, including employee stock options, in financial statements. That cost will
be measured based on the fair value of the equity or liability instruments issued. SFAS 123R provides alternative
methods of adoption which include prospective application and a modified retroactive application. SFAS 123(R) also
requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash
flow, rather than as an operating cash flow as prescribed under current accounting rules. The Company is required to