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Circuit City Stores delayed its fiscal fourth-quarter and fiscal year earnings announcement, previously scheduled for last Tuesday, “until our current lease accounting practices review is completed,” said Michael Foss, executive VP/chief financial officer. “We expect to release earnings [for the quarter and year ended Feb. 28] within seven to 14 days,” from the initial March 29 announcement date, he said.
As Circuit City stated early in March, the focus of its lease accounting practices review was on issues raised in recently published Securities and Exchange Commission guidance. “The review of these issues has not identified any material impact on previously reported statements of operations,” said Foss.
“As the company neared completion of its review, however, an additional issue was identified related to leases in which buildings were constructed by the company on leased property and transferred to the landlord after reimbursement of construction costs,” Foss continued.
“Such leases are, as a matter of course, evaluated for 'continuing involvement,' which, if present, would require Circuit City to classify a reimbursement as a financing, rather than a sale under GAAP [Generally Accepted Accounting Principles]. Under both methods, aggregate expense recognition is identical over the life of the lease, but the timing of expense recognition can differ significantly between periods,” he said.
Circuit City's independent auditors recently identified accounting interpretations which conclude that a seller-lessee, by not recovering substantially all construction costs, has “continuing involvement” in the property. Up to now, the retailer had concluded that none of the criteria for “continuing involvement,” which generally involves guaranteed residuals, guaranteed rates of return or leave the seller-lessee with investment risk, had been met for any lease arrangement.
“The company's business and its financial performance are fundamentally sound,” Foss emphasized. He said that excluding any adjustments resulting from its lease review, Circuit City expects to report earnings for the fiscal year in the range of 33 cents to 35 cents per share, after 15 cents per share for costs associated with the closings of 19 superstores, five regional offices and one distribution center, announced in February.
“At this point, we believe the cumulative impact of the multiyear lease adjustments, through Feb. 28, is less than 5 cents per share,” said Foss.
“If the full multiyear adjustment were applied against fiscal 2005 earnings, it would result in a reduction in the range of anticipated reported earnings to 28 to 30 cents per share. This adjustment would not impact historical or future net cash flow or the timing of any payments under the related leases. We have not determined whether the adjustments will require a restatement of previously reported statements of operations,” he concluded.
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