This excerpt taken from the GPS 8-K filed Feb 24, 2005.
Lease-Related Accounting Adjustments
In light of a recent SEC clarification and consultation with its auditors, Deloitte & Touche LLP, the company has re-evaluated its lease accounting practices. Like many other public companies that are correcting commonly accepted lease accounting practices, the company will change the way it accounts for its leases, including the accounting for rent holidays and tenant allowances.
These adjustments will have no impact on cash, revenues and comparable store sales.
The company currently believes that these adjustments will reduce net income on a pre-tax basis for fiscal year 2004 and prior fiscal years by an aggregate amount of $170 million to $200 million, the vast majority of which relates to periods prior to fiscal year 2002. The company has not yet reached a final decision as to whether these matters will require a restatement of its previously issued annual and interim financial statements or whether the adjustments will all be reflected in the fiscal year 2004 financial statements, but believes that restatement of prior periods is likely. This estimate is subject to change as the company completes its internal review and the results are reviewed by Deloitte & Touche LLP.
In prior periods, and consistent with industry practice, the company had recognized the straight line expense for leases beginning on the commencement date of the lease, which had the effect of excluding the construction period of its stores from the calculation of the period over which it expenses rent. In addition, a portion of tenant allowances were reflected as a reduction to store build out costs instead of being classified as deferred lease credits and were amortized over the asset life instead of the lease term. The accounting for rent expense and tenant allowances will be corrected.