Sunbeam 2004 Annual Report Download - page 34

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
2. A “modified retrospective” method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the amounts
previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of adoption.
We plan to adopt Statement 123 (R) using the modified-prospective method.
As permitted by Statement 123, we currently account for share-based payments to employees using
intrinsic value method in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, we generally recognize no compensation cost for
employee stock options. Accordingly, the adoption of Statement 123 (R)’s fair value method will have a
significant impact on our result of operations, although it will have no impact on our overall financial
position. The impact of the adoption of Statement 123 (R) cannot be predicted at this time because it
will depend on levels of share-based payments granted in the future. However, had we adopted
Statement 123 (R) in prior periods, the impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 1.,
Significant Accounting Policies of Item 8., Financial Statements and Supplementary Data included
herein. Statement 123 (R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be
in the future (because they depend on, among other things, when employees exercise stock options),
the amount of operating cash flows recognized in prior periods for such excess tax deductions were
approximately $2.0 million, $1.3 million, and $2.3 million in 2004, 2003 and 2002, respectively.
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151,
Inventory Costs, an amendment of ARB No. 43, Chapter 4 (“SFAS 151”). SFAS 151 requires the
exclusion of certain costs from inventories and the allocation of fixed production overheads to
inventories to be based on normal capacity of the production facilities. The provisions of SFAS 151 are
effective for costs incurred during fiscal years beginning after June 15, 2005. Earlier adoption is
permitted for inventory costs incurred during fiscal years beginning after the issuance date of SFAS 151.
We do not expect the adoption of SFAS 151 to have a material effect on our consolidated financial
statements.
Effective December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (Medicare Prescription Drug Act) was signed into law. This act provides for a prescription drug
benefit under Medicare (Part D) as well as a federal subsidy to sponsors of retiree health care benefits
plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Our defined benefit
postretirement health care plans provide prescription drug benefits.
In January 2004, the FASB issued FASB Staff Position (“FSP”) No. 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(“FSP 106-1”). FSP 106-1 permits a sponsor of a postretirement healthcare plan that provides a
prescription benefit to elect a one-time deferral of the recognition of the effects of the Medicare
Prescription Drug Act in accounting for its plan under Statement No. 106 and in providing disclosures
related to the plan required by SFAS 132. The FASB allowed the one-time deferral due to the accounting
issues raised by the Medicare Prescription Drug Act—in particular, the accounting for federal subsidy
that is not explicitly addressed in Statement No. 106—and due to the fact the uncertainties exist as to
the direct effects on the Medicare Prescription Drug Act and its ancillary effects on plan participants. As
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