THE CHILDREN’S PLACE RETAIL STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. BASIS OF PRESENTATION AND SUMMAR OF SIGNIFICANT ACCOUNTING POLICIES (Continued) future lease payments as of lease inception. Property and equipment is depreciated on a straight-line basis based upon their estimated useful lives, which range from three to ten years. Amortization of property and equipment under capital leases and leasehold improvements is computed on a straight-line basis over the term of the lease or the estimated useful life, whichever is shorter. During fiscal 1999, the Company adopted Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). In accordance with SOP 98-1, internal use software and other related costs are capitalized. External direct costs of materials, consulting services and payroll costs of employees working solely on the application development stage of the project are also capitalized in accordance with SOP 98-1. These capitalized costs are amortized based upon their estimated useful lives, which range from three to seven years, commencing with when the system is placed in service. Training and travel costs related to systems implementations are expensed as incurred. The Company capitalized approximately $1,180,000, $788,000 and $798,000 in programming and development costs of employees in fiscal 2001, fiscal 2000 and fiscal 1999, respectively. Store pre-opening costs, which consist primarily of payroll, supply and marketing expenses, are expensed as incurred and are included in selling, general and administrative expenses. adjusts the carrying value of assets which may not be recoverable. The Company does not believe that any impairment exists as of February 2, 2002 in the recoverability of its long-lived assets. The Company expenses the cost of advertising when the advertising is first run or displayed. Included in selling, general and administrative expenses for fiscal 2001, fiscal 2000 and fiscal 1999 are advertising costs of approximately $12,049,000, $12,943,000 and $9,218,000, respectively. The Company computes income taxes using the liability method. This standard requires recognition of deferred tax assets and liabilities, measured by enacted rates, attributable to temporary differences between financial statement and income tax basis of assets and liabilities. Temporary differences result primarily from accelerated depreciation and amortization for tax purposes and various accruals and reserves being deductible for future tax periods. Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Values of Financial Instruments,” (“SFAS 107”) requires entities to disclose the fair value of financial instruments, both assets and liabilities, recognized and not recognized in the balance sheets, for which it is practicable to estimate fair value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value is based on quoted market prices for the same or similar financial instruments. The Company capitalizes costs directly associated with acquiring third-party financing. Deferred financing costs are included in other assets and are amortized over the term of the indebtedness. As of February 2, 2002, unamortized deferred financing costs represent the cost of acquiring the Company’s working capital facility and were approximately $259,000, net of accumulated amortization of $192,000. As of February 3, 2001, unamortized deferred financing costs were approximately $259,000, net of accumulated amortization of $130,000. The Company continually evaluates the carrying value and the economic useful lives of its long-lived assets based on the Company’s operating performance and the expected undiscounted future net cash flows and 26 Fair Value of Financial Instruments Accounting for Impairment of Long-Lived Assets Deferred Financing Costs Income Taxes Advertising Costs Pre-opening Costs