Big Lots 2007 Annual Report Download - page 120

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reverse in 2008. Unrecognized tax benefits in the amount of $17.6 million have been excluded from the
table because we are unable to make a reasonably reliable estimate of the timing of future payments. Our
closed store lease termination cost payments are based on contractual terms.
(7) The obligations disclosed in this table are exclusive of the contingent liabilities, guarantees, and
indemnities related to KB Toys. For further discussion, see note 11 to the accompanying consolidated
financial statements.
Off-Balance Sheet Arrangements
As of February 2, 2008, we have KB Lease Obligations, as that term is defined in note 11 to the accompanying
consolidated financial statements, with respect to approximately 52 open KB Toys stores. In 2007, we entered
into an agreement with KB Toys and various Prentice Capital entities (owners/affiliates of KB Toys) which
we believe provides for a cap of our liability under the existing KB Toys guaranteed store leases and an
indemnification from the Prentice Capital entities with respect to any renewals, extensions, modifications,
or amendments of these guaranteed leases which could potentially add incremental liability to us beyond the
date of the agreement, which was September 24, 2007. Under these agreements, KB Toys is required to update
us periodically with respect to the status of any remaining leases which they believe we have guaranteed. In
addition, we have the right to request the net asset value of Prentice Capital Offshore in order to monitor the
sufficiency of their indemnification. Because these remaining guarantees were issued prior to January 1, 2003,
they are not subject to the fair value recognition provisions of Financial Accounting Standards Board (“FASB”)
Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. However, we will recognize a liability if a loss in connection
with any of the KB Lease Obligations becomes probable and reasonably estimable. See note 11 to the
accompanying consolidated financial statements for further discussion of KB Toys matters.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America (“GAAP”) requires management to make estimates, judgments, and assumptions
that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent
assets and liabilities at the date of the financial statements. The use of estimates, judgments, and assumptions
creates a level of uncertainty with respect to reported or disclosed amounts in our consolidated financial
statements or accompanying notes. On an on-going basis, management evaluates its estimates, judgments, and
assumptions, including those that management considers critical to the accurate presentation and disclosure of
our consolidated financial statements and accompanying notes. Management bases its estimates, judgments,
and assumptions on historical experience, current trends, and various other factors that management believes
are reasonable under the circumstances. Because of the inherent uncertainty in using estimates, judgments, and
assumptions, actual results may differ from these estimates. Management has discussed the development and
selection of its critical accounting policies and estimates with the Audit Committee of our Board of Directors
and management believes the following assumptions and estimates are the most critical to the accurate reporting
of our results of operations and financial position. See note 1 to the accompanying consolidated financial
statements for additional information about our accounting policies.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory
method. Market is determined based on the estimated net realizable value, which generally is the merchandise
selling price at or near the end of the reporting period. Under the average cost retail inventory method, inventory
is segregated into departments of merchandise having similar characteristics, at its current retail selling
value. Inventory retail selling values are converted to a cost basis by applying specific average cost factors
for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise
department based on each department’s average cost-to-retail ratio for beginning inventory and for current
fiscal year purchase activity. The average cost retail inventory method requires management to make judgments
and contains estimates, such as the amount and timing of markdowns to clear unproductive or slow-moving