Dollar General 2006 Annual Report Download - page 63

date of adoption were computed in accordance with the provisions of SFAS 123(R).) The
amount of any excess deferred tax asset over the actual income tax benefit realized for options
that are exercised after the adoption of SFAS 123(R) will be absorbed by the excess tax benefit
pool. Income tax expense will be increased should the Company’ s excess tax benefit pool be
insufficient to absorb any future deferred tax asset amounts in excess of the actual tax benefit
realized. The Company has determined that its excess tax benefit pool was approximately $68
million as of the adoption of SFAS 123(R) on February 4, 2006.
Revenue and gain recognition
The Company recognizes retail sales in its stores at the time the customer takes
possession of merchandise. All sales are net of discounts and estimated returns and are presented
net of taxes assessed by governmental authorities that are imposed concurrent with those sales.
The liability for retail merchandise returns is based on the Company’s prior experience. The
Company records gain contingencies when realized.
The Company began gift card sales in the third quarter of 2005. The Company
recognizes gift card sales revenue at the time of redemption. The liability for the gift cards is
established for the cash value at the time of purchase. The liability for outstanding gift cards was
approximately $0.8 million and $0.5 million at February 2, 2007 and February 3, 2006,
respectively, and is recorded in Accrued expenses and other. Through February 2, 2007, the
Company has not recorded any breakage income related to its gift card program. The Company
will continue to evaluate its current breakage policy as it continues to gain more sufficient
company-specific customer experience.
Advertising costs
Advertising costs are expensed upon performance, “first showing” or distribution, and are
reflected net of qualifying cooperative advertising funds provided by vendors in SG&A
expenses. Advertising costs were $45.0 million, $15.1 million and $7.9 million in 2006, 2005
and 2004, respectively. These costs primarily include promotional circulars, targeted circulars
supporting new stores, in-store signage, and costs associated with the sponsorship of a National
Association for Stock Car Auto Racing team. In addition, beginning in the fourth quarter of
2006, the Company also utilized television and radio advertising in conjunction with certain
strategic initiatives as further discussed in Note 2. Vendor funding for cooperative advertising
offset reported expenses by $7.9 million, $0.8 million and $1.0 million in 2006, 2005 and 2004,
respectively.
Capitalized interest
To assure that interest costs properly reflect only that portion relating to current
operations, interest on borrowed funds during the construction of property and equipment is
capitalized. Interest costs capitalized were approximately $2.9 million, $3.3 million and $3.6
million in 2006, 2005 and 2004, respectively.
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