Best Buy 2012 Annual Report Download - page 55

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Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our
financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect
the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates
and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our
consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates
and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because
future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and
estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, of the Notes to
Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report
on Form 10-K. We believe that the following accounting estimates are the most critical to aid in fully understanding and
evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from
the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting
estimates and related disclosures with the Audit Committee of our Board.
Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions
Inventory
We value our inventory at the lower of cost or
market through the establishment of
markdown and inventory loss adjustments.
Our inventory valuation reflects markdowns
for the excess of the cost over the amount we
expect to realize from the ultimate sale or
other disposal of the inventory. Markdowns
establish a new cost basis for our inventory.
Subsequent changes in facts or circumstances
do not result in the reversal of previously
recorded markdowns or an increase in that
newly established cost basis.
Our inventory valuation also reflects
adjustments for anticipated physical inventory
losses (e.g., theft) that have occurred since the
last physical inventory. Physical inventory
counts are taken on a regular basis to ensure
that the inventory reported in our consolidated
financial statements is properly stated.
Our markdown adjustment contains
uncertainties because the calculation requires
management to make assumptions and to
apply judgment regarding inventory aging,
forecast consumer demand, the promotional
environment and technological obsolescence.
Our inventory loss adjustment contains
uncertainties because the calculation requires
management to make assumptions and to
apply judgment regarding a number of factors,
including historical results and current
inventory loss trends.
We have not made any material changes in the
accounting methodology we use to establish our
markdown or inventory loss adjustments during the past
three fiscal years.
We do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or
assumptions we use to calculate our markdowns.
However, if estimates regarding consumer demand are
inaccurate or changes in technology affect demand for
certain products in an unforeseen manner, we may be
exposed to losses or gains that could be material. A 10%
difference in our actual markdowns at March 3, 2012,
would have affected net earnings by approximately
$8 million in fiscal 2012.
We do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or
assumptions we use to calculate our inventory loss
adjustment. However, if our estimates regarding physical
inventory losses are inaccurate, we may be exposed to
losses or gains that could be material. A 10% difference
in actual physical inventory loss adjustments at March 3,
2012, would have affected net earnings by approximately
$6 million in fiscal 2012.
Vendor Allowances
We receive funds from vendors for various
programs, primarily as reimbursements for
costs such as markdowns, margin protection,
advertising and sales incentives.
Vendor allowances provided as a
reimbursement of specific, incremental and
identifiable costs incurred to promote a
vendor's products are included as an expense
reduction when the cost is incurred. All other
vendor allowances are generally in the form of
receipt-based funds or sell-through credits.
Receipt-based funds are generally determined
based on our level of inventory purchases and
initially deferred and recorded as a reduction
of merchandise inventories. The deferred
amounts are then included as a reduction of
cost of goods sold when the related product is
sold. Sell-through credits are generally based
on the number of units we sell over a specified
period and are recognized when the related
product is sold.
Based on the provisions of our vendor
agreements, we develop vendor fund accrual
rates by estimating the point at which we will
have completed our performance under the
agreement and the deferred amounts will be
earned. During the year, due to the complexity
and diversity of the individual vendor
agreements, we perform analyses and review
historical trends to ensure the deferred
amounts earned are appropriately recorded. As
a part of these analyses, we apply rates
negotiated with our vendors to actual purchase
volumes to determine the amount of funds
accrued and receivable from the vendor.
Certain of our vendor agreements contain
purchase volume incentives that provide for
increased funding when graduated purchase
volumes are met. Amounts accrued throughout
the year could be impacted if actual purchase
volumes differ from projected annual purchase
volumes.
We have not made any material changes in the
accounting methodology we use to record different forms
of vendor allowances or vendor receivables during the
past three fiscal years.
If actual results are not consistent with the assumptions
and estimates used, we may be exposed to additional
adjustments that could materially, either positively or
negatively, impact our gross profit rate and inventory.
However, substantially all receivables associated with
these activities are collected within the following fiscal
year and all amounts deferred against inventory turnover
within the following fiscal year and therefore do not
require subjective long-term estimates. Adjustments to
our gross profit rate and inventory in the following fiscal
year have historically not been material.
A 10% difference in our vendor receivables at March 3,
2012, would have affected net earnings by approximately
$25 million in fiscal 2012.