1. Description of Business and Summary of Significant Accounting Policies (Continued)
Rent expense for the Company's leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over
the lease term. The lease term begins when the Company has the right to control the use of the property, which is typically before rent payments are due under the lease. The difference between the
rent expense and rent paid is recorded as deferred rent in the consolidated balance sheet. Rent expense for the period prior to store opening is capitalized and included in leasehold improvements in
the consolidated balance sheet. Rent expense capitalized during the pre-opening period was $1,814, $2,489 and $3,626 for the years ended December 31, 2002, 2003, and 2004,
respectively. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized as reductions of lease expense over the term of the lease.
certain of the Company's operating leases contain clauses that provide additional contingent rent based on a percentage of sales greater than certain specified target
amounts. The Company recognizes contingent rent expense prior to the achievement of the specified target that triggers contingent rent, provided the achievement of that target is considered probable.
Foreign Currency Translation
Currently, the Company has no operations outside the United States, but has created an international subsidiary to hold international trademarks. The Company's
international entity uses its local currency as the functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are
translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income in shareholders'
2. Recently Issued Accounting Standards
In October 2005, the FASB issued FASB Staff Position No. FAS 13-1, Accounting for Rental Costs Incurred during a
Construction Period (FSP 13-1). FSP 13-1 requires rental costs associated with ground or building operating leases incurred during a
construction period to be recognized as rental expense. FSP 13-1 is effective for reporting periods beginning after December 15, 2005. Retroactive application is permitted,
but not required. Had FSP 13-1 been effective, the Company would have recognized additional occupancy costs
of $1,814, $2,489 and $3,626 for the years ended December 31, 2002, 2003, and 2004 respectively and $2,649 (unaudited) and $2,655 (unaudited) for the nine months ended September 30, 2004
and 2005, respectively.