2005 Annual Report - Investor Relations - Sherwin-Williams

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars unless otherwise indicated)
experience. Management periodically assesses the
adequacy of the accrual for product warranty claims
and adjusts the accrual as necessary.
Changes in the Company’s accrual for product
warranty claims during 2005, 2004 and 2003, including
customer satisfaction settlements during the year, were
as follows:
2005 2004 2003
Balance at January 1 ..........$ 18,098 $ 16,555 $ 15,510
Charges to expense ............ 35,654 32,541 28,745
Settlements.......................... (30,749) (30,998) (27,700)
Balance at December 31 ....$ 23,003 $ 18,098 $ 16,555
Impact of recently issued accounting standards. In
April 2004, the Emerging Issues Task Force (EITF)
issued EITF No. 03-6, “Participating Securities and the
Two-Class Method Under FASB Statement No. 128,
Earnings Per Share.” EITF No. 03-6 addresses a number
of questions regarding the computation of earnings per
share by companies that have issued securities other
than common stock that contractually entitle the holder
to participate in dividends and earnings of the Company
when, and if, it declares dividends on its common stock.
The pronouncement also provides further guidance in
applying the two-class method of calculating earnings
per share, clarifying what constitutes a participating
security and how to apply the two-class method of
computing earnings per share once it is determined that
a security is participating, including how to allocate
undistributed earnings to such a security. EITF No. 03-6
was effective for fiscal periods beginning after March
31, 2004. Adoption of this pronouncement had no
effect on the Company's reported earnings per share.
In December 2004, the FASB issued FAS No. 123R
that eliminates the alternative to account for sharebased
compensation transactions using APBO No. 25
and requires instead that such transactions be accounted
for using a fair-value-based method. In April 2005, the
SEC adopted a rule that amends the compliance date of
FAS No. 123R to fiscal years beginning after June 15,
2005. The Company expects to adopt FAS No. 123R
effective January 1, 2006 under the “modified prospective”
method as described in FAS No. 123R. In the
“modified prospective” method, compensation cost is
recognized beginning with the effective date, based on
the requirements of FAS No. 123R for all share-based
payments granted after the effective date and for all
unvested awards granted prior to the effective date. The
adoption of the fair value method of FAS No. 123R will
have an impact on the Company’s results of operations
and financial condition, although it will have no impact
on the Company’s cash flow. The impact on the results
of operations cannot be predicted with certainty at this
time because it will depend on levels of share-based payments
granted in the future. However, had the Company
adopted FAS No. 123R in prior periods, the impact
would have approximated the effect of FAS No. 123 as
described in the disclosure of pro-forma net income and
net income per common share in Stock-based compensation
above. FAS No. 123R also requires the tax benefits
associated with these share-based payments to be classified
as financing activities in the Statements of consolidated
cash flows, rather than as an operating cash flow
as required under current regulations. The amount of
operating cash flows recognized for such excess tax
deductions were $17,480, $20,932 and $6,944 in 2005,
2004 and 2003, respectively.
In December 2004, the FASB issued FAS No. 151,
“Inventory Costs, an amendment of Accounting
Research Bulletin No. 43, Chapter 4,” which requires
that abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage) be recognized
as current-period charges. In addition, the statement
requires that allocation of fixed production
overheads to the costs of conversion be based on the
normal capacity of the production facilities. FAS No.
151 is effective for fiscal years beginning after June 15,
2005. The Company will adopt this statement as
required. Management does not believe the adoption
will have a material effect on the Company’s results
of operations, financial condition or liquidity.
In August 2005, the FASB issued Staff Position (FSP)
FAS No. 123R-1, “Classification and Measurement of
Freestanding Financial Instruments Originally Issued in
Exchange for Employee Services under FASB Statement
No. 123R.” FSP FAS No. 123R-1 indefinitely defers the
requirement as stated in FAS No. 123R that a sharebased
payment to an employee be subject to other applicable
generally accepted accounting principles when the
employee becomes a non-employee. Such share-based
payments will be subject to FAS No. 123R throughout
the life of the instrument, unless its terms are modified
when the holder is no longer an employee. FSP FAS No.
123R-1 will be applied upon adoption of FAS No.
123R, it will not have any impact on the Company’s
liquidity and it is not expected to have a material impact
on the Company’s results of operations or financial
condition.
50