Circuit City 2005 Annual Report Download - page 52

The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
2005
2004
2003
Expected dividend yield
0%
0%
0%
Risk
-
free interest rate
4.5%
5.5%
5.9%
Expected volatility
79.0%
46.0%
76.0%
Expected life in years
5.20
2.36
2.41
The weighted average remaining contractual life of the stock options outstanding was 6.7 years at December 31,
2005, 7.4 years at December 31, 2004 and 7.7 years at December 31, 2003.
Recent Accounting Pronouncements
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123R replaced SFAS 123, “Accounting for Stock-Based Compensation,” and superseded Accounting Principles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 adopt the provisions of SFAS 123R effective as of the beginning of
its first quarter in 2006. The Company is evaluating the available alternatives of adoption of SFAS 123R. The
Company currently accounts for share-based payments using APB Opinion 25‘s intrinsic value method and
recognizes no compensation expense for employee stock options as permitted under SFAS 123. See “Stock-
based
Compensation” above for the effect on reported net income if we had accounted for our stock-based
compensation plans using the fair value recognition provisions of SFAS 123. The actual effects of adopting
SFAS 123R will depend on numerous factors, including the amounts of share-based payments granted in the
future, the valuation model we use and estimated forfeiture rates. The Company has not made any modifications
to its stock-based compensation plans as a result of the issuance of SFAS 123R. The Company believes the
adoption of SFAS 123R will not have a material effect on its consolidated financial statements.
In March 2005, the Securities and Exchange Commission released SEC Staff Accounting Bulletin (“SAB”) 107,
“Share-Based Payment.” SAB 107 provides the SEC staff’
s position regarding the application of SFAS No. 123R
and certain SEC rules and regulations, and also provides the staff’s views regarding the valuation of share-based
payments for public companies. The Company will adopt SAB 107 in connection with its adoption of SFAS
123R. The Company is currently reviewing the effects, if any, that the application of SAB 107 will have on the
Company’s consolidated financial position and results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”),
which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes,” and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28.”
SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle.
Previously, most voluntary changes in accounting principles required recognition of a cumulative effect
adjustment within net income of the period of the change. SFAS 154 requires retrospective application to prior
periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the