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STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
B-7
carrying value of these assets might exceed their current fair values. We determine fair value using discounted cash flow
analysis, which requires us to make certain assumptions and estimates regarding industry economic factors and future
profitability of acquired businesses. It is our policy to allocate goodwill and conduct impairment testing at the individual
business unit level based on our most current business plans, which reflect changes we anticipate in the economy and the
industry. If actual results are not consistent with our assumptions and judgments, we could be exposed to a material
impairment charge.
Deferred Taxes: We record a valuation allowance to reduce our deferred tax assets to the amount that is more
likely than not to be realized. We have considered estimated future taxable income and ongoing tax planning strategies in
assessing the amount needed for the valuation allowance. If actual results differ unfavorably from those estimates used,
we may not be able to realize all or part of our net deferred tax assets and additional valuation allowances may be
required.
New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised
2004), “Share Based Payment” (“SFAS No. 123R”), which is a revision of Statement No. 123, “Accounting for Stock-
Based Compensation” (“SFAS No. 123”). SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees” and amends Statement No. 95, “Statement of Cash Flows”. Under SFAS No. 123R, companies
must calculate and record in the income statement the cost of equity instruments, such as stock options, awarded to
employees for services received; pro forma disclosure is no longer permitted. The cost of the equity instruments is to be
measured based on the fair value of the instruments on the date they are granted and is required to be recognized over
the period during which the employees are required to provide services in exchange for the equity instruments.
SFAS No. 123R provides two alternatives for adoption: (1) a “modified prospective” method in which compensation
cost is recognized for all awards granted subsequent to the effective date of this statement as well as for the unvested
portion of awards outstanding as of the effective date; or (2) a “modified retrospective” method which follows the
approach in the “modified prospective” method, but also permits entities to restate prior periods to record compensation
cost calculated under SFAS No. 123 for the pro forma disclosure. We adopted SFAS No. 123R as of January 29, 2006
using the modified retrospective method. Since we currently account for stock options granted to employees and shares
issued under our employee stock purchase plans in accordance with the intrinsic value method permitted under APB
Opinion No. 25, no compensation expense is recognized. The adoption of SFAS No. 123R is expected to have a
significant impact 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 $36.6 million,
$41.2 million and $16.8 million in fiscal 2005, 2004 and 2003, respectively.
On April 14, 2005, the Securities and Exchange Commission announced that it would delay the required
implementation of SFAS No. 123R, allowing companies that are not small business issuers to adopt the Statement no
later than the beginning of the first fiscal year beginning after June 15, 2005. As a result of this delay, we adopted SFAS
No. 123R as of January 29, 2006.
Liquidity and Capital Resources
Cash Flows
Cash provided by operations increased to $1.24 billion in fiscal 2005, from $1.18 billion in fiscal 2004 and
$1.02 billion in fiscal 2003. As a result of the application of Issue 02-16 in 2003, net income and merchandise inventories