Pacific Sunwear, in conjunction with the filing of its annual report on Form 10-K for the year ended Jan. 29, 2005, reduced the amount of its lease accounting corrections announced in its earlier reports. The final lease accounting changes reflected in the Company's 2005 10-K were made after discussion by management and the Audit Committee of the Board of Directors of the Company with Deloitte & Touche LLP, the Company's independent registered public accounting firm.
PSUN had previously announced that its consolidated balance sheets had reflected the unamortized portion of construction allowances from landlords as a reduction of property and equipment instead of as a deferred rent credit, and statements of cash flows had reflected construction allowances as a reduction of capital expenditures within cash flows from investing activities, rather than cash flows from operating activities.
The company had also previously announced that in prior periods they had recognized the straight line rent expense for leases beginning on the commencement date of store operations, which had the effect of excluding the build-out period of its stores (during which the Company typically made no rent payments) from the calculation of the period over which it expenses rent.
In conjunction with the preparation and filing of its 2005 10-K, the Company has now determined that it will capitalize rent costs recognized during a construction period as a cost of the constructed asset. The Company has determined that as a result of the adoption of this capitalization method, the impact of all the lease corrections on the Company's consolidated statements of income resulted in reductions of net income of less than $0.1 million for each of the fiscal years ended Jan. 29, 2005, Jan. 31, 2004, and Feb. 1, 2003, respectively. These amounts are lower than the previously announced reductions of net income contained in the earlier press releases dated Feb. 23, 2005, and March 1, 2005.
The Company has filed the corrections to its annual and interim financial statements in the 2005 10-K. The Company's Forms 10-Q for fiscal 2005 will reflect the restated information for the corresponding quarters in fiscal 2004.
