Note 2

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

All significant intercompany accounts, transactions and profits have been eliminated in consolidation. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the balance sheet date. Income and expense items are translated at the average exchange rates during the respective periods. Translation adjustments resulting from fluctuations in the exchange rates are recorded in accumulated other comprehensive income, a separate component of shareholder’s equity. Gains and losses resulting from the exchange rate fluctuations on transactions denominated in currencies other than the functional currency are not material.

Reclassifications

The Company has reclassified certain amounts from 1998 and 1999 to conform to the 2000 presentation.

Year End

The Company’s year end is the last Friday in February with each fiscal quarter including 13 weeks. Fiscal years presented herein include the 52-week periods ended February 25, 2000, February 26, 1999 and February 27, 1998.

Revenue Recognition

Net sales include product sales, service revenues and leasing revenues. Product sales and service revenues are recognized as products are shipped and services are rendered. Leasing revenue includes interest earned on the net investments in leased assets, which is recognized over the lease term as a constant percentage return. Service and leasing revenues are not material.

Cash Equivalents

Cash equivalents consist of highly liquid investments, primarily interest-earning deposits, treasury notes and commercial paper, with an original maturity of three months or less. Cash equivalents are reported at amortized cost, which approximates market, and approximated $17.0 million and $72.9 million as of February 25, 2000 and February 26, 1999, respectively.

Long-Term Investments

The Company currently classifies its investments as available-for-sale or held-to-maturity. Investments classified as available-for-sale approximated $1.5 million and $5.5 million as of February 25, 2000 and February 26, 1999, respectively. Gross unrealized gains and losses, net of taxes, are charged or credited to comprehensive income, a separate component of shareholders’ equity. Investments classified as held-to-maturity typically include treasury notes, tax-exempt municipal bonds and other debt securities which the Company has the intent and ability to hold until maturity. These investments are reported at amortized cost. Investments classified as long-term mature over the next five years.

Investments in corporate-owned life insurance (“COLI”) policies, which were purchased to fund employee benefit plan obligations, are recorded at their net cash surrender values as reported by the issuing insurance companies associated with the COLI.

Inventories

Inventories are stated at the lower of cost or market and are valued based upon the last-in, first-out (“LIFO”) method and the average cost method.

Property and Equipment

Property and equipment are stated at the lower of cost or net realizable value and depreciated using the straight line-method over the estimated useful life of the assets. Internal-use software applications and related development efforts are capitalized and amortized over the estimated useful lives of the applications, which do not exceed five years except for certain business application systems which approximate ten years. Software maintenance, Year 2000 related matters and training costs are expensed as incurred. Estimated useful lives of property and equipment are as follows:

Buildings and improvements			10 - 50 years
Machinery and equipment			3 - 15 years
Furniture and fixtures			5 - 8 years
Leasehold improvements			3 - 10 years
Capitalized software			3 - 10 years

Leased Assets

The Company’s net investment in leased assets includes both direct financing and operating leases. Direct financing leases consist of the present value of the future minimum lease payments receivable (typically over three to five years) plus the present value of the estimated residual value (collectively referred to as the net investment). Residual value is an estimate of the fair value of the leased equipment at the end of the lease term, which the Company records based on market studies conducted by independent third parties.

Operating leased assets consist of the equipment cost, less accumulated depreciation. Depreciation is recognized on a straight-line basis over the lease term to the estimated residual value, which is determined on the same basis as direct financing leases as set forth above.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets resulting from business acquisitions are stated at cost and amortized on a straight-line basis over a period of 15 to 40 years. The carrying value for goodwill totaled $352.4 million and $86.2 million at February 25, 2000 and February 26, 1999, respectively. Goodwill and other intangible asset amortization expense approximated $16.9 million, $4.1 million and $4.2 million for 2000, 1999 and 1998, respectively.

The Company reviews long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If it is determined that an impairment loss has occurred based on expected future cash flows, a current charge to income is recognized.

Product Related Expenses

Research and development expenses, which are expensed as incurred, approximated $70.0 million, $75.0 million and $70.0 million for 2000, 1999 and 1998, respectively.

Self-Insurance

The Company is self-insured for certain losses relating to workers’ compensation claims, employee medical benefits and product liability claims. The Company has purchased stop-loss coverage in order to limit its exposure to any significant levels of workers’ compensation and product liability claims. Self-insured losses are accrued based upon the Company’s estimates of the aggregate liability for uninsured claims incurred using certain actuarial assumptions followed in the insurance industry and the Company’s historical experience. The accrued liabilities for self-insured losses included in other accrued expenses in the accompanying consolidated balance sheets are as follows:

(in millions)
	Feb 25, 2000	Feb 26, 1999
Workers' compensation claims	$ 18.2	$ 18.6
Product liability claims	10.4	11.5
	$ 28.6	$ 30.1

The Company maintains a Voluntary Employees’ Beneficiary Association (“VEBA”) to fund employee medical claims covered under self-insurance. The estimates for incurred but not reported medical claims, which have been fully funded by the Company in the VEBA, approximated $6.8 million and $7.9 million as of February 25, 2000 and February 26, 1999, respectively.

Product Warranty

The Company offers a lifetime warranty on Steelcase brand products, subject to certain exceptions, which provides for the free repair or replacement of any covered product or component that fails during normal use because of a defect in design, materials or workmanship. Accordingly, the Company provides, by a current charge to operations, an amount it estimates will be needed to cover future warranty obligations for products sold. In accordance with its warranty policy, the Company reserved for known warranty issues regarding its Pathways based products. See Note 20 regarding the one-time Pathways warranty charge taken in the fourth quarter of fiscal 2000. The accrued liability for warranty costs included in other accrued expenses in the accompanying consolidated balance sheets approximated $54.5 million (including the Pathways warranty reserve) and $20.6 million as of February 25, 2000 and February 26, 1999, respectively.

Environmental Matters

Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition allegedly caused by past operations, that are not associated with current or future revenue generation, are expensed. Liabilities are recorded when material environmental assessments and remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with completion of a feasibility study or the Company’s commitment to a formal plan of action. The accrued liability for environmental contingencies included in other accrued expenses in the accompanying consolidated balance sheets approximated $10.0 million and $10.7 million as of February 25, 2000 and February 26, 1999, respectively. Based on the Company’s ongoing oversight of these matters, the Company believes that it has accrued sufficient reserves to absorb the costs of all known environmental assessments and the remediation costs of all known sites.

Advertising

Advertising costs, which are expensed as incurred, approximated $18.8 million, $11.3 million and $7.9 million for 2000, 1999 and 1998, respectively.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.

Earnings Per Share

Basic earnings per share is based on the weighted average number of shares of common stock outstanding during each period. It excludes the dilutive effects of additional common shares that would have been outstanding if the shares, under the Company’s Stock Incentive Plans, had been issued. Diluted earnings per share includes effects of the Company’s Stock Incentive Plans. The weighted average number of shares outstanding for basic and diluted calculations were 152.8 million, 153.8 million and 154.8 million for 2000, 1999 and 1998, respectively.

Stock-Based Compensation

Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, encourages entities to record compensation expense for stock-based employee compensation plans at fair value, but provides the option of measuring compensation expense using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees . The Company has elected to account for its Stock Incentive Plans in accordance with APB Opinion No. 25. Pro forma results of operations, as if the fair value method prescribed by SFAS No. 123 had been used to account for its Stock Incentive Plans, are presented in Note 13.

Fair Value of Financial Instruments

The carrying amount of the Company’s financial instruments, consisting of cash equivalents, investments, accounts and notes receivable, accounts and notes payable, short-term borrowings and certain other liabilities, approximate their fair value due to their relatively short maturities.

The carrying amount of the Company’s long-term debt approximates fair value due to the variable interest rates applied to the debt.

See additional discussion regarding foreign currency contracts and interest rate swaps and caps in Note 16.

Accounting for Derivative Instruments and Hedging Activities

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , establishes accounting and reporting standards for derivative instruments, requiring recognition of the fair value of all derivatives as assets or liabilities on the balance sheet. Gains and losses resulting from changes in fair value would be included in income, or in comprehensive income, depending on whether the instrument qualifies for hedge accounting and the type of hedging instrument involved. This statement is effective for fiscal years beginning after June 15, 2000. Management intends to adopt the provisions of SFAS No. 133 in fiscal year 2002. The impact of this pronouncement on the Company’s financial results is currently being evaluated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts and disclosures in the consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.