Dollar Tree 2006 Annual Report Download - page 35

Consolidated Balance Sheets as a component of
“other liabilities” (see Note 6). Changes in the fair
values of these interest rate swaps are recorded as
“interest expense” and “change in the fair value of
non-hedging interest rate swaps” in the accompany-
ing Consolidated Statements of Operations and the
Consolidated Statements of Cash Flows, respectively.
Lease Accounting
The Company recognized a one-time non-cash, after-
tax adjustment of $5.7 million, or $0.05 per diluted
share, in the fourth quarter of 2004 to reflect the
cumulative impact of a correction of its accounting
practices related to leased properties. Of the afore-
mentioned amount, approximately $1.2 million, or
$0.01 per diluted share, related to fiscal 2004.
Consistent with industry practices, in prior
periods, the Company had reported its straight line
expenses for leases beginning on the earlier of the
store opening date or the commencement date of the
lease. This had the effect of excluding the pre-open-
ing or build-out period of its stores (generally 60
days) from the calculation of the period over which
it expenses rent. In addition, amounts received as
tenant allowances were reflected in the balance sheet
as a reduction to store leasehold improvement costs
instead of being classified as deferred lease credits.
The adjustment made to correct these practices does
not affect historical or future net cash flows or the
timing of payments under related leases. Rather, this
change affected the classification of costs in the
accompanying Consolidated Statement of Operations
and Cash Flows by increasing depreciation and
decreasing rent expense, which is included in cost of
sales. In addition, fixed assets and deferred liabilities
increased due to the net cumulative unamortized
allowances and abatements.
Revenue Recognition
The Company recognizes sales revenue at the time
a sale is made to its customer.
Taxes Collected
The Company reports taxes assessed by a governmen-
tal authority that are directly imposed on revenue-
producing transactions (i.e., sales tax) on a net
(excluded from revenues) basis.
DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 33
Cost of Sales
The Company includes the cost of merchandise, ware-
housing and distribution costs, and certain occupancy
costs in cost of sales.
Pre-Opening Costs
The Company expenses pre-opening costs for new,
expanded and relocated stores, as incurred.
Advertising Costs
The Company expenses advertising costs as they
are incurred. Advertising costs approximated $10.6
million, $11.8 million and $11.0 million for the years
ended February 3, 2007, January 28, 2006, and
January 29, 2005, respectively.
Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable
to differences between financial statement carrying
amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply
to taxable income in the years in which those tempo-
rary differences are expected to be recovered or set-
tled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the
period that includes the enactment date of such change.
Stock-Based Compensation
Effective, January 29, 2006, the Company adopted
Statement of Financial Accounting Standards, No.
123 (revised 2004), Share-Based Payment, (SFAS
123R). This statement is a revision of SFAS 123 and
supersedes Accounting Principle Board Opinion No.
25, Accounting for Stock Issued to Employees, (APB
Opinion 25). SFAS 123R requires all share-based
payments to employees, including grants of employee
stock options, to be recognized in the financial state-
ments based on their fair values. The Company
adopted SFAS 123R using the modified prospective
method, which requires application of the standard
to all awards granted, modified, repurchased or can-
celled on or after January 29, 2006, and to all awards
granted to employees that were unvested as of