HD » Topics » Impact of the Adoption of EITF 02-16

This excerpt taken from the HD 10-K filed Mar 29, 2006.

Impact of the Adoption of EITF 02-16

In fiscal 2003, we adopted EITF 02-16 which states that certain cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be recorded as a reduction of Cost of Sales when recognized in our Consolidated Statements of Earnings. That presumption is overcome when the consideration is either a reimbursement of specific, incremental and identifiable costs incurred to sell the vendor's products or a payment for assets or services delivered to the vendor. We receive consideration in the form of advertising co-op allowances from our vendors pursuant to annual agreements, which are generally on a calendar year basis. As permitted by EITF 02-16, we elected to apply its provisions prospectively to all agreements entered into or modified after December 31, 2002. Therefore, the impact of us adopting EITF 02-16 in fiscal 2003 was limited to advertising co-op allowances earned pursuant to vendor agreements entered into in late 2003, which became effective in January 2004.

The one-month impact of the adoption of EITF 02-16 in fiscal 2003 resulted in a reduction of Cost of Sales of $40 million, an increase in SG&A of $47 million and a reduction of Earnings before Provision for Income Taxes of $7 million. The impact on our Diluted Earnings per Share was immaterial.

The impact of the adoption of EITF 02-16 in fiscal 2004 resulted in a reduction of Cost of Sales of $891 million, an increase in SG&A of $1.0 billion and a reduction of Earnings before Provision for Income Taxes of $158 million. The impact on our Diluted Earnings per Share for fiscal 2004 was a reduction of $0.04 per share.

EITF 02-16 did not have a material impact on our fiscal 2005 consolidated results of operations or financial condition as of January 29, 2006.

Prior to the adoption of EITF 02-16 in fiscal 2003, the entire amount of advertising co-op allowances received was offset against advertising expense and resulted in a reduction of SG&A. We continue to earn certain advertising co-op allowances that are recorded as an offset against advertising expenses as they are reimbursements of specific, incremental and identifiable costs incurred to promote vendors' products. In fiscal 2005, 2004 and 2003, net advertising expense was $1.1 billion, $1.0 billion and $58 million, respectively, which was recorded in SG&A.

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The following table illustrates the full-year effect on Cost of Sales, Gross Profit, SG&A, Operating Income and Diluted Earnings per Share as if advertising co-op allowances had always been treated as a reduction of Cost of Sales in accordance with EITF 02-16 (amounts in millions, except per share data):

 
  Fiscal Year Ended
 
  January 29,
2006

  January 30,
2005

  February 1,
2004

Cost of Sales                  
As Reported   $ 54,191   $ 48,664   $ 44,236
Pro Forma     54,191     48,524     43,295
   
 
 
Gross Profit                  
As Reported     27,320     24,430     20,580
Pro Forma     27,320     24,570     21,521
   
 
 
Selling, General and Administrative Expenses                  
As Reported     16,485     15,256     12,713
Pro Forma     16,485     15,256     13,654
   
 
 
Operating Income                  
As Reported     9,363     7,926     6,846
Pro Forma     9,363     8,066     6,846
   
 
 
Diluted Earnings per Share                  
As Reported   $ 2.72   $ 2.26   $ 1.88
Pro Forma   $ 2.72   $ 2.30   $ 1.88
   
 
 
This excerpt taken from the HD 10-K filed Apr 11, 2005.

IMPACT OF THE ADOPTION OF EITF 02-16

        In fiscal 2003, we adopted EITF 02-16 which states that certain cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be recorded as a reduction of Cost of Merchandise Sold when recognized in our Consolidated Statements of Earnings. That presumption is overcome when the consideration is either a reimbursement of specific, incremental and identifiable costs incurred to sell the vendor's products or a payment for assets or services delivered to the vendor. We received consideration in the form of advertising co-op allowances from our vendors pursuant to annual agreements, which are generally on a calendar year basis. As permitted by EITF 02-16, we elected to apply its provisions prospectively to all agreements entered into or modified after December 31, 2002. Therefore, the impact of us adopting EITF 02-16 in fiscal 2003 was limited to advertising co-op allowances earned pursuant to vendor agreements entered into in late 2003, which became effective in January 2004.

        The one-month impact of the adoption of EITF 02-16 in fiscal 2003 resulted in a reduction of Cost of Merchandise Sold of $40 million, an increase in Selling and Store Operating Expenses of $47 million and a reduction of Earnings before Provision for Income Taxes of $7 million. The impact on our Diluted Earnings per Share was immaterial. Merchandise Inventories in our accompanying Consolidated Balance Sheets as of February 1, 2004 were also reduced by $7 million.

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        The impact of the adoption of EITF 02-16 in fiscal 2004 resulted in a reduction of Cost of Merchandise Sold of $891 million, an increase in Selling and Store Operating Expenses of $1.0 billion and a reduction of Earnings before Provision for Income Taxes of $158 million.

        The impact on our Diluted Earnings per Share for fiscal 2004 was a reduction of $0.04 per share. We do not expect any further impact on our Diluted Earnings per Share from the adoption of EITF 02-16. Merchandise Inventories in our accompanying Consolidated Balance Sheets as of January 30, 2005 were also reduced by $158 million.

        Prior to the adoption of EITF 02-16 in fiscal 2003, the entire amount of advertising co-op allowances received was offset against advertising expense and resulted in a reduction of Selling and Store Operating Expenses. In fiscal 2002, advertising co-op allowances exceeded gross advertising expense by $30 million. This excess amount was recorded as a reduction of Cost of Merchandise Sold in the accompanying Consolidated Statements of Earnings. We continue to earn certain advertising co-op allowances that are recorded as an offset against advertising expenses as they are reimbursements of specific, incremental and identifiable costs incurred to promote vendors' products. In fiscal 2004 and fiscal 2003, net advertising expense was $1.0 billion and $58 million, respectively, which was recorded in Selling and Store Operating Expenses.

        The following table illustrates the full-year effect on Cost of Merchandise Sold, Gross Profit, Selling and Store Operating Expenses, Operating Income and Diluted Earnings per Share as if advertising co-op allowances had always been treated as a reduction of Cost of Merchandise Sold in accordance with EITF 02-16 (amounts in millions, except per share data):

 
  Fiscal Year Ended
 
  January 30,
2005

  February 1,
2004

  February 2,
2003

COST OF MERCHANDISE SOLD
As Reported
  $ 48,664   $ 44,236   $ 40,139
Pro Forma     48,524     43,295     39,284
   
 
 
GROSS PROFIT
As Reported
    24,430     20,580     18,108
Pro Forma     24,570     21,521     18,963
   
 
 
SELLING AND STORE OPERATING EXPENSES
As Reported
    15,105     12,588     11,276
Pro Forma     15,105     13,529     12,157
   
 
 
OPERATING INCOME
As Reported
    7,926     6,846     5,830
Pro Forma     8,066     6,846     5,804
   
 
 
DILUTED EARNINGS PER SHARE
As Reported
  $ 2.26   $ 1.88   $ 1.56
Pro Forma   $ 2.30   $ 1.88   $ 1.56
   
 
 

EXCERPTS ON THIS PAGE:

10-K
Mar 29, 2006
10-K
Apr 11, 2005
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