Staples 2012 Annual Report Download - page 123

C-11
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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.
Selling, General and Administrative Expenses: Selling, general and administrative 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 costs of producing an advertisement 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 $19.5 million at February 2, 2013 and January 28, 2012. The cost of communicating an advertisement is expensed when
the communication occurs. Total advertising and marketing expense was $533.6 million, $582.6 million and $560.5 million for
2012, 2011 and 2010, respectively.
Stock-Based Compensation: The Company accounts for stock-based compensation in accordance with ASC Topics 505
Equity and 718 Stock Compensation. Stock-based compensation for stock options is measured based on the estimated fair value
of each award on the date of grant using a binomial valuation model. Stock-based compensation for restricted shares is measured
based on the closing market price of the Company's common stock price on the date of grant, less the present value of dividends
expected to be paid on the underlying shares but foregone during the vesting period. The Company recognizes stock-based
compensation costs as expense on a straight-line basis over the requisite service period.
Pension and Other Post-Retirement Benefits: The Company maintains pension and post-retirement life insurance plans
for certain employees globally. These plans include significant obligations, which are calculated based on actuarial valuations.
Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan
assets, discount rates and inflation. The Company also makes assumptions regarding employee demographic factors such as
retirement patterns, mortality, turnover and the rate of compensation increases. These assumptions are evaluated annually.
Foreign Currency: 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 are recorded as a separate component of stockholders' equity. Foreign currency transaction gains
and losses relate to the settlement of assets or liabilities in another currency. Foreign currency transaction gains (losses) were
$(3.1) million, $0.5 million and $(7.6) million for 2012, 2011 and 2010, respectively. These amounts are included in Other income
(expense), net.
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 accumulated other 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.
Accounting for Income Taxes: Deferred income tax assets and liabilities are determined based on the differences between
financial reporting and tax bases of assets and liabilities and are measured using the enacted income tax rates and laws that are
expected to be in effect when the temporary differences are expected to reverse. Additionally, deferred income tax assets and
liabilities are separated into current and non-current amounts based on the classification of the related assets and liabilities for
financial reporting purposes.
The Company accounts for uncertain tax provisions in accordance with ASC Topic 740 Income Taxes. These provisions
require companies to determine whether it is "more likely than not" that a tax position will be sustained upon examination by the
appropriate taxing authorities before any benefit can be recorded in the financial statements. An uncertain income tax position
will not be recognized if it has less than a 50% likelihood of being sustained.
Recently Adopted Accounting Pronouncements
In May 2011, a pronouncement was issued providing consistent definitions and disclosure requirements of fair value
with respect to U.S. GAAP and International Financial Reporting Standards. The pronouncement changed certain fair value
measurement principles and enhanced the disclosure requirements, particularly for Level 3 measurements. The changes were
effective prospectively for interim and annual periods beginning after December 15, 2011. The Company adopted this