Restatement - Share-based Compensation

9 Months Ended

Nov. 02, 2013

Restatement - Share-based Compensation

Restatement-Accounting for Income Taxes

Note 2. Restatement — Share-based Compensation

The Company determined its previously issued unaudited interim consolidated financial statements for the three and nine months ended October 27, 2012, contained an error with respect to ASC 718, Compensation — Stock Compensation. The accounting error was material to fiscal 2011 and fiscal 2012 financial statements and those financial statements required restatement. As a result, the Company is also restating its financial statements for the three and nine months ended October 27, 2012.  Specifically, former participants in the Company’s Equity Incentive Plan and its successor Plan (The Michaels Companies, Inc. (“Parent”) Equity Incentive Plan, together the “Plan”) exercised stock options upon their termination from the Company, and the Company repurchased the immature shares. Immature shares are defined as shares held for less than six months following exercise. The Company consistently repurchased shares in this manner and therefore, under accounting rules, established a pattern of repurchasing immature shares during the third quarter of 2011. The Company determined all stock options should have been treated as liability awards in accordance with the rules of ASC 718-10-25-9. Under liability accounting, the Company re-measures the fair value of stock compensation each period and recognizes changes in fair value as awards vest and until the award is settled. The Company originally recognized expense ratably over the vesting period based on the grant date fair value of the option in accordance with the fixed method of accounting.   The impact to share-based compensation cost for the three and nine months ended October 27, 2012, was $2 million ($1, net of tax) and $12 million ($7, net of tax), respectively.

The following tables illustrate the correction as associated with certain line items in the unaudited interim consolidated financial statements (amounts in millions):

	Consolidated Balance Sheet
	As of October 27, 2012
	(unaudited)
	As Reported			Share-based compensation Adjustment			As Restated
Merchandise inventories	$	1,076		$	2		$	1,078
Total current assets	1,387			2			1,389
Deferred income taxes	18			14			32
Total non-current assets	170			14			184
Share-based compensation	—			30			30
Income taxes payable	8			(2		)	6
Total current liabilities	987			28			1,015
Share-based compensation	—			24			24
Total long-term liabilities	3,285			24			3,309
Additional paid-in capital	61			(10		)	51
Accumulated deficit	(2,438		)	(26		)	(2,464		)
Total stockholders’ deficit	(2,371		)	(36		)	(2,407		)

	Consolidated Statements of Comprehensive Income
	Quarter Ended October 27, 2012
	(unaudited)
	As Reported		Share-based compensation Adjustment			As Restated
Cost of sales and occupancy expense	$	611	$	1		$	612
Gross Profit	403		(1		)	402
Selling, general and administrative expense	278		(1		)	277
Share-based compensation expense	—		2			2
Operating income	119		(2		)	117
Income before income taxes	56		(2		)	54
Provision for income taxes	20		(1		)	19
Net income	36		(1		)	35
Comprehensive income	36		(1		)	35

	Consolidated Statements of Comprehensive Income
	Nine Months Ended October 27, 2012
	(unaudited)
	As Reported		Share-based compensation Adjustment			As Restated
Cost of sales and occupancy expense	$	1,730	$	6		$	1,736
Gross Profit	1,154		(6		)	1,148
Selling, general and administrative expense	790		(3		)	787
Share-based compensation expense	—		9			9
Operating income	349		(12		)	337
Income before income taxes	160		(12		)	148
Provision for income taxes	58		(5		)	53
Net income	102		(7		)	95
Comprehensive income	102		(7		)	95

	Cash Flow Data
	Nine Months Ended October 27, 2012
	(unaudited)
	As Reported			Share-based compensation Adjustment		As Restated
Operating Activities:
Net income	$	102		(7	)	$	95
Share-based compensation and other	4			11		15
Merchandise inventories	(236		)	3		(233		)
Accrued liabilities and other	(11		)	(4	)	(15		)
Income taxes	(27		)	(6	)	(33		)
Net cash provided by operating activities	16			(3	)	13
Repurchase of Common Stock	(10		)	10		—
Proceeds from stock options exercised	7			(7	)	—
Net cash used in financing activities	(141		)	3		(138		)