Best Buy 2007 Annual Report Download - page 96

$ in millions, except per share amounts
81
PART II
The future minimum lease payments under our capital, financing and operating leases by fiscal year (not including
contingent rentals) at March 3, 2007, were as follows:
Fiscal Year
Capital
Leases
Financing
Leases
Operating
Leases
2008 $ 6 $ 23 $ 741
2009 4 23 715
2010 4 23 672
2011 3 23 632
2012 1 23 592
Thereafter 17 112 3,316
Subtotal 35 227 $6,668
Less: imputed interest (11) (56)
Present value of lease obligations $ 24 $171
Total minimum lease payments have not been reduced by minimum sublease rent income of approximately $119 due under
future noncancelable subleases.
During fiscal 2006, we entered into a capital lease
agreement totaling $16 for a distribution center. During
fiscal 2005, we entered into a capital lease agreement
totaling $10 for a corporate facility. These leases were
noncash transactions and have been eliminated from our
consolidated statements of cash flows.
Fiscal 2005 Lease Accounting Correction
We conducted an extensive review of our lease accounting
practices during the fourth quarter of fiscal 2005 in light of
the views expressed by the SEC in its letter dated
February 7, 2005, to the American Institute of Certified
Public Accountants Center for Public Company Audit Firms.
In the letter, the SEC expressed its views regarding
operating lease accounting matters and the related
interpretation/application of these matters under existing
GAAP.
Following our review, we recorded a cumulative
fourth-quarter charge of $36 pre-tax ($23 net of tax) to
correct our accounting for certain operating lease matters.
Of the $36 pre-tax charge, $15 was recorded as a charge
to SG&A, while the remaining $21 was recorded as a
charge to interest expense. We determined that no
restatement was required due to the immaterial impact of
the errors on fiscal 2005 and prior periods.
The $15 charge to SG&A was primarily related to rent
holidays. Rent holidays are considered to be any period
during which a tenant has the right to control use of the
leased property, but rent payments are not required.
Historically, we recognized rent expense beginning at the
inception of the contractual lease term, which was generally
when the store opened. Effective with the fourth quarter of
fiscal 2005 and through fiscal 2006, we recognized rent
expense beginning when we took possession of the property
unless we were actively constructing the facility, in which
case straight-line rent amounts were capitalized. As
discussed in Note 1, Summary of Significant Accounting
Policies — Leases, beginning in the first quarter of fiscal
2007, we adopted on a prospective basis FSP No. FAS
13-1, Accounting for Rental Costs Incurred During a
Construction Period, which requires companies to expense
rent payments for building and ground lease obligations
incurred during the construction period.
The $21 charge to interest expense was related to the
change in accounting for certain leases as financing leases
rather than operating leases, as these lease transactions did
not qualify for sale-leaseback treatment in accordance with
SFAS No. 98, Accounting for Leases: Sale-Leaseback
Transactions Involving Real Estate, Sales-Type Leases of
Real Estate, Definition of the Lease Term, and Initial Direct
Costs of Direct Financing Leases. For financing leases, the
gross cost of constructing the asset is included in property
and equipment and amounts reimbursed from the landlord
are recorded as financing obligations. In fiscal 2005, we
made a $107 adjustment to increase property and
equipment, and financing obligations. This adjustment was
considered a noncash transaction and has been excluded
from the consolidated statements of cash flows. Financing
obligations are included in our consolidated balance sheets