Staples 2006 Annual Report Download - page 113

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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 $31.2 million at February 3, 2007 and $28.4 million at January 28, 2006. Total advertising and
marketing expense was $660.3 million, $588.2 million and $526.0 million for fiscal years 2006, 2005 and 2004,
respectively.
Pre-opening Costs: Pre-opening costs, which consist primarily of salaries, supplies, marketing and distribution costs,
are expensed as incurred.
Stock-Based Compensation: The Company adopted Financial Accounting Standards Board (“FASB”) Statement
No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123R”) as of January 29, 2006, using the modified
retrospective method. As a result, the consolidated financial statements for fiscal years 2005 and 2004 have been restated
to reflect the adoption of this standard. The impact on net income and earnings per share from the adoption of SFAS
No. 123R is consistent with the pro forma amounts previously disclosed in our annual reports. As a result of adopting
SFAS No. 123R, the Company recorded an increase of $310.2 million to Additional Paid-In Capital at January 31, 2004
and a reduction of $242.4 million to Retained Earnings at January 31, 2004.
Foreign Currency Translation: The assets and liabilities of Staples’ foreign subsidiaries are translated into U.S.
dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average
monthly exchange rates. The resulting translation adjustments, and the net exchange gains and losses resulting from the
translation of investments in Staples’ foreign subsidiaries are recorded as a separate component of stockholders’ equity.
Derivative Instruments and Hedging Activities: The Company recognizes all derivative financial instruments in the
consolidated financial statements at fair value. Changes in the fair value of derivative financial instruments that qualify
for hedge accounting are recorded in stockholders’ equity as a component of comprehensive income or as an adjustment
to the carrying value of the hedged item. Changes in fair values of derivatives not qualifying for hedge accounting are
reported in earnings.