Big Lots 2007 Annual Report Download - page 122

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Share-Based Compensation
We adopted the fair value recognition provisions for stock options of SFAS No. 123(R), Accounting for Share-
Based Compensation, on January 29, 2006, under the modified prospective method, in which the requirements
of SFAS No. 123(R) are to be applied to new awards and to previously granted awards that were not fully vested
on the effective date. The modified prospective method does not require restatement of previous years’ financial
statements. We used the short-cut method to determine our beginning excess tax benefit pool. Upon adoption,
the benefit of tax deductions in excess of recognized compensation cost is reported as a financing cash flow
rather than as an operating cash flow. We value and expense stock options with graded vesting as a single award
with an average estimated life over the entire term of the award. The expense for options with graded vesting is
recorded straight-line over the vesting period. The fair value of nonvested restricted stock awards is measured
at the grant date and is amortized on a straight-line basis over the vesting period. Compensation expense for all
share-based awards is recognized in selling and administrative expense.
We use a binomial model to estimate the fair value of stock options granted on or after February 1, 2004. The
binomial model takes into account variables such as volatility, dividend yield rate, risk-free rate, contractual
term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the
probability of retirement of the option holder in computing the value of the option. Expected volatility is based
in part on historical and current implied volatilities from traded options on our common shares. The risk-free
rate is based on U.S. Treasury security yields at the time of the grant. The dividend yield on our common shares
is assumed to be zero since we have not paid dividends and have no immediate plans to do so. The expected
life is determined from the binomial model. The model incorporates exercise and post-vesting forfeiture
assumptions based on analysis of historical data.
Compensation expense for performance-based nonvested restricted stock awards is recorded based on the
estimated achievement date of the performance criteria. An estimated target achievement date is determined
at the time of the award based on historical and forecasted performance of similar measures. We monitor the
projected achievement of the performance targets at each reporting period and make prospective adjustments to
the estimated vesting period when our internal models indicate that the estimated achievement date differs from
the date being used to amortize expense.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes the enactment date.
We assess the adequacy and need for a valuation allowance for deferred tax assets. In making such
determination, we consider all available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.
We establish a valuation allowance to reduce our deferred tax assets to the balance that is more likely than not to
be realized.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in
the accompanying consolidated statement of operations. Accrued interest and penalties are included within the
related tax liability line in the accompanying consolidated balance sheet.
The effective income tax rate in any period may be materially impacted by the overall level of income (loss)
before income taxes, the jurisdictional mix and magnitude of income (loss), changes in the income tax laws
(which may be retroactive to the beginning of the fiscal year), subsequent recognition, de-recognition and/or
measurement of an uncertain tax benefit in accordance with FIN No. 48, Accounting for Uncertainty in Income
Taxes, changes in a deferred tax valuation allowance, and adjustments of a deferred tax asset or liability for
enacted changes in tax laws or rates.