Petsmart 2006 Annual Report Download - page 69

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Stock-based Compensation
Prior to January 31, 2005, the Company accounted for stock-based compensation plans under the recognition
and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-based Compen-
sation.” Effective January 31, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R),
Share-Based Payment, using the modified retrospective transition method, which allows the adjustment of prior
periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote disclosure
under the provisions of SFAS No. 123.
Stock-based compensation costs include: (a) compensation cost for all share-based payments granted on or
before January 30, 2005, based on the grant-date fair value estimated in accordance with the original provisions of
SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 30, 2005,
based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).
Foreign Currency Translation and Transactions
The local currency has been used as the functional currency in Canada. The Company translates assets and
liabilities denominated in foreign currency into United States dollars at the current rate of exchange at year-end, and
translates revenues and expenses at the average exchange rate during the year. Translation gains and losses are
included as a separate component of other comprehensive income, and transaction gains and losses are included in
net income.
Other Comprehensive Income
Foreign currency translation adjustments were the only component of other comprehensive income and are
reported separately in stockholders’ equity. The income tax benefit related to the foreign currency translation
adjustments was $297,000, $41,000, and $1,387,000 for fiscal 2006, 2005 and 2004, respectively.
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average of common shares
outstanding during each period. Diluted earnings per share reflects the potential dilution of securities that could
share in earnings, such as potentially dilutive common shares that may be issuable upon the exercise of outstanding
common stock options and unvested restricted stock, and is calculated by dividing net income by the weighted
average shares, including dilutive securities, outstanding during the period.
Recently Issued Accounting Pronouncements
In September 2006, the Securities and Exchange Commission, or SEC, released SAB No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”
SAB No. 108 provides interpretive guidance on the SEC’s views regarding the process of quantifying materiality of
financial statement misstatements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The
application of SAB No. 108 in the fourth quarter of fiscal 2006 did not have a material effect on the Company’s
consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income
Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in financial statements in
accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating FIN No. 48 to determine its impact on the Company’s
consolidated financial statements.
F-13
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)