Pier 1 2007 Annual Report Download - page 35

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In September 2006, the Securities and Exchange Commission staff published Staff Accounting Bulle-
tin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements” (“SAB 108”). SAB 108 explains how the effects of prior year uncorrected errors
must be considered in quantifying misstatements in the current year financial statements. SAB 108 offers a
special “one-time” transition provision for correcting certain prior year misstatements that were uncorrected as
of the beginning of the fiscal year of adoption. SAB 108 is effective for the Company as of the end of fiscal
year 2007. The adoption of this statement as of March 3, 2007, did not have an impact on the Company’s
consolidated balance sheet and statements of operations, shareholders’ equity and cash flows.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement” (“SFAS 157”). SFAS 157
provides a definition of fair value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS 157 is effective for the Company as of the beginning of fiscal year
2009. The Company does not expect the adoption of this statement to have a material impact on its
consolidated balance sheet and statements of operations, shareholders’ equity and cash flows.
In September 2006, the FASB issued SFAS No. 158 “Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)”
(“SFAS 158”). SFAS 158 requires companies to recognize the funded status of postretirement benefit plans as
an asset or liability in the financial statements. The transition date for recognition of an asset or liability
related to the funded status of an entity’s plan is effective for the Company as of the end of fiscal year 2007.
The Company adopted the funded status recognition portion of SFAS 158 as of March 3, 2007, and recorded
an additional liability with an offset to other comprehensive income of $1,631,000. In addition, SFAS 158
requires an employer to measure its postretirement benefit plan assets and benefit obligations as of the date of
the employer’s fiscal year end. This portion of the statement is effective for the Company for fiscal 2009 and
is not expected to have a material impact on the Company’s consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market risks relating to the Company’s operations result primarily from changes in foreign exchange rates
and interest rates. The Company has only limited involvement with derivative financial instruments, does not
use them for trading purposes and is not a party to any leveraged derivatives. Collectively, the Company’s
exposure to market risk factors is not significant and has not materially changed from February 25, 2006.
Foreign Currency Risk
Though the majority of the Company’s inventory purchases are made in U.S. dollars in order to limit its
exposure to foreign currency fluctuations, the Company periodically enters into forward foreign currency
exchange contracts. The Company uses such contracts to hedge exposures to changes in foreign currency
exchange rates associated with purchases denominated in foreign currencies, primarily euros. The Company
also uses contracts to hedge its exposure associated with repatriation of funds from its Canadian operations.
Changes in the fair value of the derivatives are included in the Company’s consolidated statements of
operations as such contracts are not designated as hedges under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” Forward contracts that hedge merchandise purchases generally have
maturities not exceeding six months. Changes in the fair value and settlement of these forwards are included
in cost of sales. Contracts that hedge the repatriation of Canadian funds have maturities not exceeding
18 months and changes in the fair value and settlement of these contracts are included in selling, general and
administrative expenses. At March 3, 2007, there were no outstanding contracts to hedge exposure associated
with the Company’s merchandise purchases denominated in foreign currencies or the repatriation of Canadian
funds.
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