This excerpt taken from the ROST 10-K filed Apr 14, 2005.
Restatement of Consolidated Financial Statements
On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission (SEC) issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their treatment under generally accepted accounting principles in the United States of America (GAAP). In response to this letter, the Company initiated a review of its lease related accounting and determined that the Companys method of accounting for landlord incentives or allowances under operating leases (tenant improvement allowances) and the Companys method of accounting for rent holidays were not consistent with this guidance.
The Company historically accounted for tenant improvement allowances as reductions of fixed assets on the consolidated balance sheets and as reductions of capital expenditures in investing activities in the consolidated statements of cash flows. The Company historically amortized leasehold improvements over the original lease term, typically 10 years. The Company determined that the appropriate interpretation of Financial Accounting Standards Board (FASB) Technical Bulletin No. 881, Issues Relating to Accounting for Leases, requires these allowances to be recorded as deferred rent liabilities on the consolidated balance sheets, amortized over the lease term, and included as a component of operating activities in the consolidated statements of cash flows.
The Company historically amortized rent holiday periods on a straightline basis over the lease term based on the store opening date, which excluded the build-out period for its stores from the term over which it expensed rent. The Company considered FASB Technical Bulletin No. 853, Accounting for Operating Leases with Scheduled Rent Increases, and determined that the lease term should commence on the date the Company takes possession of the leased space for construction purposes, which is generally one to four months prior to the opening date.
In addition, the Company historically capitalized rent during the construction period for its distribution and headquarter facilities. The Company considered interpretive guidance based on analogies to FASB Statement No. 34, Capitalization of Interest Cost, and FASB Statement No. 67, Accounting for the Costs and Initial Rental Operations of Real Estate Projects regarding capitalization of rent during the period of time a lessee is performing construction activities. The Company concluded that its historical policy of capitalizing rent during the build-out period is appropriate and has corrected its accounting to apply the policy to the build-out period for all facilities, including its stores.
As a result, the Company restated the consolidated financial statements for its fiscal years 2003 and 2002.
The corrections are summarized in Note B to the consolidated financial statements included in this report at Part II, Item 8. The accompanying Managements Discussion and Analysis gives effect to these restatement adjustments.