Staples 2005 Annual Report Download - page 94

STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
C-9
NOTE A Summary of Significant Accounting Policies (Continued)
accounts payable approximate fair value because of their short-term nature, and the carrying amounts of Staples’ debt
approximates fair value because of the Company’s use of derivative instruments that qualify for hedge accounting.
Revenue Recognition: Revenue is recognized at the point of sale for the Company’s retail operations and at the
time of shipment for its delivery sales. The Company offers its customers various coupons, discounts and rebates, which
are treated as a reduction of revenue.
Sales of extended service plans are either administered by an unrelated third party or by the Company. The
unrelated third party is the legal obligor in most of the areas they administer and accordingly bears all performance
obligations and risk of loss related to the service plans sold in such areas. In these areas, Staples recognizes a net
commission revenue at the time of sale for the service plans. In certain areas where Staples is the legal obligor, the
revenues associated with the sale are deferred and recognized over the life of the service contract, which is typically one
to five years.
Cost of Goods Sold and Occupancy Costs: Cost of goods sold and occupancy costs includes the costs of
merchandise sold, inbound and outbound freight, receiving and distribution and store and distribution center occupancy
(including real estate taxes and common area maintenance).
Shipping and Handling Costs: All shipping and handling costs are included as a component of cost of goods sold
and occupancy costs.
Operating and Selling Expenses: Operating and selling expenses include payroll, advertising and other operating
expenses for the Company’s stores and delivery operations not included in cost of goods sold and occupancy costs.
Advertising: Staples expenses the production costs of advertising the first time the advertising takes place, except
for the cost of direct-response advertising, primarily catalog production costs, which are capitalized and amortized over
their expected period of future benefits (i.e., the life of the catalog). Direct catalog production costs included in prepaid
and other assets totaled $28.4 million at January 28, 2006 and $30.8 million at January 29, 2005. Total advertising and
marketing expense was $588.2 million, $526.0 million and $492.7 million for fiscal years 2005, 2004 and 2003,
respectively.
Pre-opening Costs: Pre-opening costs, which consist primarily of salaries, supplies, marketing and distribution costs,
are expensed as incurred.
Stock Option Plans: Staples accounts for its stock-based plans under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”) and provides pro forma disclosures of the compensation
expense determined under the fair value provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”
(“SFAS No. 123”) as amended by SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and
Disclosure” (“SFAS No. 148”). Under APB No. 25, since the exercise price of Staples’ employee stock options equals the
market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by SFAS No. 148, which also
requires that the information be determined as if Staples had accounted for its employee stock options granted
subsequent to January 28, 1995 under the fair value method of that Statement. For options granted prior to May 1, 2005,
the fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. For stock
options granted on or after May 1, 2005, the fair value of each award is estimated on the date of grant using a binomial
valuation model. The binomial model considers characteristics of fair value option pricing that are not available under
the Black-Scholes model. Similar to the Black-Scholes model, the binomial model takes into account variables such as
volatility, dividend yield rate, and risk free interest rate. However, in addition, the binomial model considers the
contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and
the probability of termination or retirement of the option holder in computing the value of the option. For these reasons,
the Company believes that the binomial model provides a fair value that is more representative of actual experience and
future expected experience than that value calculated using the Black-Scholes model.