Circuit City 2006 Annual Report Download - page 37

not yet vested as of, January 1, 2006, based on the grant-date fair value estimated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for the vested portion of share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).
Results for prior periods have not been restated.
The fair value of employee share options is recognized in expense over the vesting period of the options, using the
graded attribution method. The fair value of employee share options is determined on the date of grant using the Black-
Scholes option pricing model. The Company has used historical volatility in its estimate of expected volatility. The
expected life represents the period of time (in years) for which the options granted are expected to be outstanding. The
Company used the simplified method for determining expected life as permitted in SEC Staff Accounting Bulletin 107
for options qualifying for such treatment (“plain-vanilla” options) due to the limited history the Company currently has
with option exercise activity. The risk
-
free interest rate is based on the U.S. Treasury yield curve.
In periods prior to 2006, the Company followed the accounting provisions of Accounting Principles Board (“APB”)
Opinion 25, “Accounting for Stock Issued to Employees” for stock-based compensation and provided the pro forma
disclosures required under SFAS 148, “Accounting for Stock-based Compensation – Transition and Disclosure.” No
stock-based employee compensation was reflected in net income (loss), as all options granted under the plans had an
exercise price equal to the market value of the underlying stock on the date of grant (See Note 8).
Recent Accounting Pronouncements
In June 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06
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3,
“
How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross
versus Net Presentation).” The consensus requires disclosure of either the gross or net presentation, and any such taxes
reported on a gross basis should be disclosed in the interim and annual financial statements. This Issue is effective for
financial reporting periods beginning after December 15, 2006. The Company does not expect to change its
presentation of such taxes, as its sales are currently recorded net of tax.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “
Accounting for
Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)", which is effective for fiscal years
beginning after December 15, 2006. This interpretation was issued to clarify the accounting for uncertainty in income
taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The
Company is currently evaluating the potential impact, if any, of this pronouncement.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 provides
interpretative guidance on how the effects of the carryover or reversal of prior year misstatements should be considered
in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a
balance sheet and an income statement approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This
pronouncement is effective for fiscal years ending after November 15, 2006. This pronouncement had no impact on the
Company
’
s consolidated financial statements for the year ended December 31. 2006.
2.
RESTATEMENT OF PREVIOUSLY FILED FINANCIAL STATEMENTS
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 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