Big Lots 2007 Annual Report Download - page 123

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In July 2006, the FASB issued FIN No. 48, which became effective at the beginning of 2007. FIN No. 48 is an
interpretation of SFAS No. 109, Accounting for Income Taxes, and clarifies the accounting for uncertainty in
income tax positions. FIN No. 48 requires us to recognize in our financial statements the impact of an income
tax position, if that position is more likely than not of being sustained, based on the technical merits of the
position.
The recognition and measurement guidelines of FIN No. 48 were applied to all of our material income tax
positions as of the beginning of 2007, resulting in an increase in our tax liabilities of $2.2 million with a
corresponding decrease to beginning retained earnings for the cumulative effect of a change in accounting
principle.
Significant judgment is required in determining the provision for income taxes, unrecognized tax benefits,
and the related accruals and deferred tax assets and liabilities. In the ordinary course of business, there are
transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are
subject to audit by various tax authorities. Although we believe that our estimates are reasonable, actual results
could differ from these estimates resulting in a final tax outcome that may be materially different from that
which is reflected in our consolidated financial statements.
Pension
Actuarial valuations are used to calculate the estimated expenses and obligations for our pension plans.
Inherent in the actuarial valuations are several assumptions including discount rate and expected return on
plan assets. We review external data and historical trends to help determine the discount rate and expected
long-term rate of return. Our objective in selecting a discount rate is to identify the best estimate of the rate at
which the benefit obligations would be settled on the measurement date. In making this estimate, we review
rates of return on high-quality, fixed-income investments available at the measurement date and expected to be
available during the period to maturity of the benefits. This process includes a review of the bonds available on
the measurement date with a quality rating of Aa or better. The expected long-term rate of return on assets is
derived from detailed periodic studies, which include a review of asset allocation strategies, anticipated future
long-term performance of individual asset classes, risks (standard deviations), and correlations of returns among
the asset classes that comprise the plan’s asset mix. While the studies give appropriate consideration to recent
plan performance and historical returns, the assumption is primarily a long-term, prospective rate of return.
The weighted average discount rate used to determine the net periodic pension cost for 2007 is 5.9%. A 0.5%
decrease in the discount rates would increase net periodic pension cost by $0.1 million. The long-term rate of
return on assets used to determine net periodic pension cost in 2007 is 8.5%. A 1.0% decrease in the expected
long-term rate of return on plan assets would increase the net periodic pension cost by $0.5 million.
Insurance and Insurance-related Reserves
We are self-insured for certain losses relating to property, general liability, workers’ compensation, and
employee medical and dental benefit claims, a portion of which is funded by employees. We purchase stop-
loss coverage from third party insurance carriers to limit individual or aggregate loss exposure in these areas.
Accrued insurance liabilities and related expenses are based on actual claims reported and estimates of claims
incurred but not reported. The estimated loss accruals for claims incurred but not paid are determined by
applying actuarially-based calculations taking into account historical claims payment results and known trends
such as claims frequency and claims severity. Management makes estimates, judgments, and assumptions with
respect to the use of these actuarially-based calculations, including but not limited to, estimated health care cost
trends, estimated lag time to report and pay claims, average cost per claim, network utilization rates, network
discount rates, and other factors. General liability and workers’ compensation liabilities are recorded at our
estimate of their net present value, using a 4% discount rate, while other liabilities for insurance reserves are not
discounted. To the extent that actual claim costs vary from the estimates we have recorded and reflected in our
consolidated financial statements, future earnings could be materially impacted.