Napa Auto Parts 2005 Annual Report Download - page 32

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
On December 16, 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), which is a revision of SFAS No. 123.
SFAS No. 123(R) supersedes APB No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123.
However, SFAS No. 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. The Company
will adopt SFAS No. 123(R) on January 1, 2006.
SFAS No. 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 SFAS No. 123(R) for all share-
based payments granted after the effective date and (b)
based on the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of SFAS
No. 123(R) that remain unvested on the effective date.
2. A “modified retrospective” method which includes
the requirements of the modified prospective method
described above, but also permits entities to restate based
on the amounts previously recognized under SFAS No. 123
for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim 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 an Amendment of FASB Statement
No. 123. 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 SFAS
No. 123(R) on January 1, 2006. Because SFAS No. 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 SFAS No. 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 SFAS No. 123 will be recognized
under SFAS No. 123(R).
However, had we adopted SFAS No. 123(R) in prior periods, the
impact of that standard would have approximated the impact
of SFAS No. 123 as described in the disclosure of pro forma net
income and earnings per share in Note 5 to our consolidated
financial statements. SFAS No. 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 cash flows in periods after adoption as more
fully disclosed in Note 5 of the notes to the consolidated
financial statements.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement Obligations, an
interpretation of FASB Statement No. 143. Asset retirement
obligations are legal obligations associated with the retirement
of long-lived assets, except for certain obligations of lessees.
FIN 47 clarifies that liabilities associated with asset retirement
obligations whose timing or settlement method are conditional
on future events should be recorded at fair value as soon as fair
value is reasonably estimable. FIN 47 also provides guidance on
the information required to reasonably estimate the fair value
of the liability. FIN 47 is effective for fiscal years ending after
December 15, 2005. The Company has evaluated the guidance
in FIN 47 and determined that the impact of adoption was
not significant.
In May 2005, the FASB issued Statement No. 154, (SFAS No.
154) Accounting Changes and Error Corrections. Under
SFAS No. 154, entities will be required to report a change in
accounting principle through retrospective application of the
new accounting principle to all prior periods, unless impractica-
ble to do so. Under SFAS No. 154 a change in the method of
applying an accounting principle is considered a change in
accounting principle. Further,any errors in the financial state-
ments of a prior period discovered subsequent to their issuance
shall be reported as a prior period adjustment by restating
the prior period financial statements. SFAS No. 154 will be
effective for accounting changes and corrections of errors
made, if any,beginning in 2006.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with SFAS No. 142, the Company performed an
annual goodwill and indefinite lived intangible asset impair-
ment test during the fourth quarter of 2005, 2004, and 2003.
The present value of future cash flows approach was used to
determine any potential impairment. The Company determined
that these assets were not impaired and, therefore, no
Notes to Consolidated Financial Statements
(continued)