Petsmart 2004 Annual Report Download - page 51

Öuctuate from quarter-to-quarter in a Ñscal year. Sales of certain products and services designed to address pet
health needs are seasonal. Because our stores typically draw customers from a large trade area, sales also may
be impacted by adverse weather or travel conditions, which are more prevalent during certain seasons of the
year. Finally, as a result of our expansion plans, the timing of new store openings and related preopening
expenses, the amount of revenue contributed by new and existing stores, and the timing and estimated
obligations of store closures, our quarterly results of operations may Öuctuate.
Recent Accounting Pronouncements
The FASB issued FASB Interpretation, or FIN, 46, ""Consolidation of Variable Interest Entities,'' an
interpretation of Accounting Research Bulletin No. 51, ""Consolidated Financial Statements,'' on January 17,
2003. FIN 46 requires that an entity holding a majority of the ""variable interest'' of a ""variable interest entity''
must consolidate the operations of that variable interest entity of which it is the primary beneÑciary. In 2003,
we purchased two land parcels from a structured lease Ñnancing facility. Subsequent to this purchase and also
in 2003, the structured lease Ñnancing facility was liquidated. FIN 46 was eÅective for us on August 4, 2003.
With the liquidation of the special purpose entity during 2003, the adoption of FIN 46 did not have a material
impact on our consolidated Ñnancial statements.
In March 2003, the FASB's Emerging Issues Task Force, or EITF, reached a consensus on Issue 02-16,
""Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor.'' The
transition provisions apply prospectively to arrangements with vendors entered into or modiÑed after
December 31, 2002, do not allow for prior period reclassiÑcation, and require companies to account for all
amounts received from vendors as a reduction of the cost of the products purchased unless certain criteria are
met that allow companies to account for vendor funding as a reduction of related operating, general and
administrative expenses. During 2004, 2003 and 2002, we recorded approximately $10.4 million, $10.9 million
and $11.0 million, respectively, for cooperative promotional income. We adopted the provisions of EITF 02-16
for vendor contracts entered into or modiÑed subsequent to December 31, 2002, and the adoption did not have
a material impact on the consolidated Ñnancial statements.
In November 2003, the FASB's Emerging Issues Task Force reached a consensus on Issue 03-10,
""Application of Issue No. 02-16 by Resellers to Sales Incentives OÅered to Consumers by Manufacturers.''
Under EITF 03-10, any cash consideration a company receives from a vendor as part of a certain exclusive
sales incentive arrangement must be recorded in the income statement as an oÅset to cost of sales, and cannot
be recorded as revenue, unless the company meets certain criteria. EITF 03-10 is eÅective for new
arrangements and modiÑcations to existing arrangements entered into in Ñscal periods beginning after
November 25, 2003. EITF 03-10 permits reclassiÑcation of prior periods for comparison purposes. We
adopted EITF 03-10 on February 2, 2004, which resulted in a decrease in sales and a corresponding decrease
in cost of sales in the consolidated statements of operations of $3.3 million and $2.9 million in Ñscal 2004 and
2003, respectively.
On December 16, 2004, the FASB issued FASB Statement No. 123 (revised 2004), ""Share-Based
Payment'' (""SFAS 123(R)''), which is a revision of FASB Statement No. 123 (""SFAS 123''), ""Accounting
for Stock-Based Compensation'' and supersedes APB Opinion No. 25, ""Accounting for Stock Issued to
Employees,'' and its related implementation guidance. SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the Ñnancial statements based on
their grant-date fair values. SFAS 123(R) is eÅective for public companies at the beginning of the Ñrst
interim or annual period beginning after June 15, 2005. We intend to adopt SFAS 123(R) beginning in our
Ñrst quarter of Ñscal 2005 ending May 1, 2005 and intend to utilize the modiÑed retrospective transition
method, which allows the restatement of prior periods by recognizing compensation cost in the amounts
previously reported in the pro forma footnote disclosures under the provisions of SFAS 123.
In July 2004, the EITF reached a consensus on Issue 02-14, ""Whether the Equity Method of Accounting
Applies When an Investor Does Not Have an Investment in Voting Stock of an Investee But Exercises
SigniÑcant InÖuence Through Other Means'' (""EITF 02-14''). EITF 02-14 concludes that the equity method
of accounting is applicable to investments in common stock and in-substance common stock when the investor
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