Napa Auto Parts 2004 Annual Report Download - page 32

30
notes to consolidated financial statements
(continued)
In January 2003, the Emerging Issues Task Force (EITF) of the
FASB issued EITF Issue No. 02-16, Accounting by a Customer
(Including Reseller) for Certain Consideration Received from a
Vendor (EITF 02-16). EITF 02-16 addresses accounting and
reporting issues related to how a reseller should account for
certain consideration received from vendors. Generally, certain
consideration received from vendors is presumed to be a reduc-
tion of prices of the vendor’s products or services and should,
therefore, be characterized as a reduction of cost of sales when
recognized in the customer’s income statement. However, under
certain circumstances, this presumption may be overcome and
recognition as revenue or as a reduction of other costs in the
income statement may be appropriate. The Company, in certain
circumstances, previously included funds of this type in selling,
administrative and other expenses. Under the new method,
vendor allowances for advertising and catalog related programs
are generally considered a reduction of cost of goods sold. On
January 1, 2003, the Company adopted EITF 02-16 and recorded
a non-cash charge of $19.5 million ($.11 and $.12 per basic and
diluted share, respectively), net of a tax benefit of $13.6 million,
related to the capitalization of certain vendor consideration as
part of inventory cost. Had the Company accounted for vendor
considerations in accordance with EITF 02-16 in prior years, the
capitalization of these vendor considerations would not have a
significant impact on the consolidated statements of income for
the year ended December 31, 2002. In addition, as a result of
the January 1, 2003 adoption of EITF 02-16, approximately $111
million and $102 million were reclassified from selling, adminis-
trative and other expenses to cost of goods sold in the consoli-
dated statement of income for the years ended December 31,
2004 and 2003, respectively. In accordance with EITF 02-16, the
income statement presentations for periods prior to January 1,
2003 have not been reclassified. Had the Company accounted
for consideration received from vendors in accordance with EITF
02-16 in prior years, approximately $90 million would have been
reclassified from selling, administrative and other expenses to
cost of goods sold in the consolidated statement of income for
the year ended December 31, 2002.
FASB Staff Position (FSP) No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004 (FSP 109-2), provides
guidance under FASB Statement No. 109, Accounting for
Income Taxes, with respect to recording the potential impact of
the repatriation provisions of the American Jobs Creation Act of
2004 (the Jobs Act) on enterprises’ income tax expense and
deferred tax liability. The Jobs Act was enacted on October 22,
2004. FSP 109-2 states that an enterprise is allowed time beyond
the financial reporting period of enactment to evaluate the effect
of the Jobs Act on its plan for reinvestment or repatriation of
foreign earnings for purposes of applying FASB Statement No.
109. The Company has not yet completed evaluating the impact
of the repatriation provisions. Accordingly, as provided for in FSP
109-2, the Company has not adjusted its tax expense or deferred
tax liability to reflect the repatriation provisions of the Jobs Act.
On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued FASB Statement No. 123 (revised 2004),
Share-Based Payment, which is a revision of FASB Statement
No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in Statement
123(R) is similar to the approach described in Statement 123.
However, Statement 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative. We expect to
adopt Statement 123(R) on July 1, 2005.
Statement 123(R) permits public companies to adopt its require-
ments using one of two methods:
1. A “modified prospective” method in which compensation cost
is recognized beginning with the effective date (a) based on
the requirements of Statement 123(R) for all share-based
payments granted after the effective date and (b) based on
the requirements of Statement 123 for all awards granted to
employees prior to the effective date of Statement 123(R)
that remain unvested on the effective date.
2. A “modified retrospective” method which includes the require-
ments of the modified prospective method described above,
but also permits entities to restate based on the amounts
previously recognized under Statement 123 for purposes of
pro forma disclosures either (a) all prior periods presented
or (b) priorinterim periods of the year of adoption.
The Company adopted the fair-value-based method of accounting
for share-based payments effective January 1, 2003 using the
prospective method described in FASB Statement No. 148,
Accounting for Stock-Based Compensation — Transition and
Disclosure. Currently, the Company uses the Black-Scholes
formula to estimate the value of stock options granted to
employees and expects to continue to use this acceptable
option valuation model upon the required adoption of Statement
123(R) on July 1, 2005. Because Statement 123(R) must be
applied not only to new awards but to previously granted awards
that are not fully vested on the effective date, and because the
Company adopted Statement 123 using the prospective transition
method (which applied only to awards granted, modified or
settled after the adoption date), compensation cost for some
previously granted awards that were not recognized under
Statement 123 will be recognized under Statement 123(R).
However, had we adopted Statement 123(R) in prior periods, the
impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net
income and earnings per share in Note 7 to our consolidated
financial statements. Statement 123(R) also requires the benefits
of tax deductions in excess of recognized compensation cost to
be reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing