Staples 2004 Annual Report Download - page 102

STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE A Summary of Significant Accounting Policies (Continued)
on our results of operations, although it will have no impact on our overall financial position. The impact of adopting
SFAS No. 123R cannot be accurately estimated at this time, as it will depend on the market value and the amount of
share based awards granted in future periods. However, had we adopted SFAS No. 123R in a prior period, the impact
would approximate the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per
share in Note A to the Consolidated Financial Statements. SFAS No. 123R also requires that tax benefits received in
excess of compensation cost be reclassified from operating cash flows to financing cash flows in the Consolidated
Statement of Cash Flows. This change in classification will reduce net operating cash flows and increase net financing
cash flows in the periods after adoption. While the amount of this change cannot be estimated at this time, the amount of
operating cash flows recognized in prior periods for such excess tax deductions were $72.5 million, $30.3 million and
$22.8 million in fiscal 2004, 2003 and 2002, respectively.
Reclassifications: Certain previously reported amounts have been reclassified to conform with the current period
presentation.
NOTE B Change in Accounting Principle
In November 2002, the Emerging Issues Task Force (‘‘EITF’’) reached consensus on Issue No. 02-16, ‘‘Accounting by
a Customer (Including a Reseller) for Certain Consideration Received from a Vendor’’ (‘‘Issue 02-16’’). Issue 02-16
addresses the accounting for vendor consideration received by a customer and is effective for new arrangements, or
modifications of existing arrangements, entered into after December 31, 2002. Under this consensus, there is a
presumption that amounts received from vendors should be considered a reduction of inventory cost unless certain
restrictive conditions are met. Under previous accounting guidance, we accounted for all non-performance based volume
rebates as a reduction of inventory cost and all cooperative advertising and other performance based rebates as a
reduction of marketing expense or cost of goods sold, as appropriate, in the period the expense was incurred. Beginning
with contracts entered into in January 2003, we adopted a policy to treat all vendor consideration as a reduction of
inventory cost rather than as an offset to the related expense because the administrative cost of tracking the actual
related expenses, to determine whether we meet the restrictive conditions required by Issue 02-16, would exceed the
benefit.
To record the impact of including cooperative advertising and other performance based rebates in inventory at the
end of the first quarter of 2003, we recorded an aggregate, non-cash adjustment of $98.0 million ($61.7 million net of
taxes) as an increase to cost of goods sold and occupancy costs, or $0.13 per diluted share. This adjustment reflected all
of our outstanding vendor contracts, as substantially all contracts were either entered into or amended in the first quarter
of 2003. In addition, the new accounting method resulted in reporting $246.6 million of the Company’s cooperative
advertising rebates earned in 2003 as cost of goods sold and occupancy costs, whereas these amounts would have been
reported as a reduction of operating and selling expenses under previous accounting guidance. In accordance with this
consensus, prior periods have not been restated to reclassify amounts recorded as a reduction of operating and selling
expenses to cost of goods sold and occupancy costs.
In November 2003, the EITF reached consensus on Issue No. 03-10 ‘‘Application of Issue No. 02-16 by Resellers to
Sales Incentives Offered to Consumers by Manufacturers’’ (‘‘Issue 03-10’’), which addresses the accounting for consider-
ation received by a reseller from a vendor that is a reimbursement by the vendor for honoring the vendor’s sales
incentives offered directly to consumers (e.g., coupons). Beginning with the first quarter of fiscal 2004, vendor
consideration received in the form of sales incentives is now recorded as a reduction of cost of goods sold when
recognized, rather than as a component of sales. In addition, the Company has reclassified certain other coupons
previously classified as operating and selling expenses to a reduction of sales. In accordance with Issue No. 03-10, our
fiscal 2003 results have been reclassified, however no change has been made to the fiscal 2002 results reported. These
reclassifications had no impact on net income.
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