Petsmart 2004 Annual Report Download - page 77

Download and view the complete annual report

Please find page 77 of the 2004 Petsmart annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 102

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102

PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
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
has the ability to exercise signiÑcant inÖuence over the operating and Ñnancial policies of an investee.
EITF 02-14 was applicable in the Ñrst reporting period beginning after September 14, 2004. The Company
adopted EITF 02-14 during the fourth quarter of Ñscal 2004, and the adoption had no impact on its Ñnancial
position or results of operations.
ReclassiÑcations
For comparative purposes, certain prior year amounts have been reclassiÑed to conform to the current
year presentation.
Note 2 Ì Restatement of and ReclassiÑcations in Consolidated Financial Statements and Notes to
Consolidated Financial Statements
Restatement of Consolidated Financial Statements and Notes to Consolidated Financial Statements
Accounting for Leases
On February 7, 2005, the OÇce of the Chief Accountant of the Securities and Exchange Commission
(""SEC'') issued a letter to the American Institute of CertiÑed Public Accountants clarifying the SEC staÅ's
interpretation of certain accounting issues and their application under accounting principles generally accepted
in the United States of America (""GAAP'') relating to leases. As a result, PETsMART conducted an internal
review and determined that certain of its lease accounting methods were not in accordance with GAAP, as
described below.
Rent holiday periods
The Company had historically recognized rent holiday periods on a straight-line basis over the lease term
commencing with the store opening date. The Company has now determined that the lease term should
include all periods in which the Company has the right to control the use of the property, including
construction and set-up periods prior to the store opening.
Rent increases
Many of the Company's leases have rent escalation provisions based on a factor of the Consumer Price
Index (CPI) with speciÑed maximum increase amounts. These leases have historically been accounted for
under the FASB's Statement of Financial Accounting Standard (""SFAS'') No. 29, Determining Contingent
Rentals, which provides that probability-based contingent rentals should be expensed as incurred. However, in
connection with the Company's internal review of its lease accounting practices, the Company determined
that in almost all cases, these leases reach their maximum rate increase and the maximum rate increase
should be included in the straight-line rental expense.
The primary eÅect of the correction of the accounting for rent holiday periods and rent increases is to
accelerate the recognition of rent expense and to increase deferred rent liability balances. In situations where
the aÅected lease is a capital lease, the correction may increase the capital lease asset and the related
obligation, as well as the amount of interest and depreciation expense recognized in the consolidated
statements of operations.
F-15