Best Buy 2006 Annual Report Download - page 62

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48
Description Judgments and Uncertainties
Effect if Actual Results Differ From
Assumptions
Stock-Based Compensation
We have a stock-based compensation plan,
whichincludes non-qualified stock options
and nonvested share awards, and an
employee stock purchase plan. See Note 1,
Summary of Significant Accounting Policies,
and Note 5, Shareholders’ Equity, to the
Notes to Consolidated Financial
Statements, included in Item 8, Financial
Statements and Supplementary Data, of this
Annual Report on Form 10-K, for a
complete discussion of our stock-based
compensation programs.
We determine the fair valueof our non-
qualified stock option awards at the date of
grant using option-pricing models. Non-
qualified stock option awards granted prior
to fiscal 2006 were valued using a Black-
Scholes model. Non-qualified stock option
awards granted in fiscal 2006 were
primarily valued using a lattice model.
We determine the fair valueof our market-
based and performance-based nonvested
share awards at the date of grant using
generally accepted valuation techniques
and the closing market price of our stock.
Management reviews its assumptions and
the valuations provided by independent
third-party valuation advisors to determine
the fair value of stock-based compensation
awards.
Option-pricing models and generally
accepted valuation techniques require
management to make assumptions and to
apply judgment to determine the fair value
of our awards. These assumptions and
judgments include estimating the future
volatility of our stock price, expected
dividend yield, future employee turnover
rates and future employee stock option
exercise behaviors. Changes in these
assumptions can materially affect the fair
value estimate.
Performance-based nonvested share awards
require management tomake assumptions
regarding the likelihood of achieving
company or personal performance goals.
We do not believe there is a reasonable
likelihood there will bea material change in
the future estimates or assumptions we use
to determine stock-based compensation
expense. However, if actual results are not
consistent with our estimates or
assumptions, we may be exposed to
changes in stock-based compensation
expense that could be material.
If actual results are not consistent with the
assumptions used, the stock-based
compensation expense reported in our
financial statements may not be
representative of the actual economiccost
of the stock-based compensation.
A 10% change in our stock-based
compensation expense for the year ended
February 25, 2006, would have affected
net earnings by approximately $9 million for
the fiscal year ended February 25, 2006.
Self-Insured Liabilities
We are self-insured for certain losses
related to health, workers’ compensation
and general liability claims. However, we
obtain third-party insurance coverage to
limit our exposure to these claims.
When estimating our self-insuredliabilities,
we consider a number of factors, including
historical claims experience, demographic
factors, severity factors and valuations
provided by independent third-party
actuaries.
Periodically, management reviews its
assumptions and thevaluations provided by
independent third-party actuaries to
determine the adequacy of our self-insured
liabilities.
Our self-insured liabilities contain
uncertainties because management is
required to make assumptions and to apply
judgment to estimate the ultimate cost to
settle reported claims and claims incurred
but notreported as of the balance sheet
date.
We have not made any material changes in
the accounting methodology used to
establish our self-insured liabilities during
the past three fiscal years.
We do not believe there is a reasonable
likelihood that there will be a material
change in the estimates or assumptions we
use to calculate our self-insured liabilities.
However, if actual results are not consistent
with our estimates or assumptions, we may
be exposed to losses or gains that could be
material.
A 10% change in our self-insured liabilities
at February 25, 2006, would have affected
net earnings by approximately $6 million for
the fiscal year ended February 25, 2006.