Big Lots 2007 Annual Report Download - page 138

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
In July 2006, the FASB issued FIN No. 48, which was 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 a 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.
Pension
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). Beginning
with our February 3, 2007 statement of financial condition, SFAS No. 158 requires us to recognize an asset
for the over funded status or a liability for the under funded status of a defined benefit plan and beginning
in 2007, to recognize annual changes in gains or losses, prior service costs, or other credits that have not yet
been recognized as a component of net periodic pension cost, net of tax through other comprehensive income.
Effective in 2008, SFAS No. 158 also requires us to measure defined benefit plan assets and obligations as of
the date of our year-end consolidated balance sheet. Currently, our pension plans have a measurement date of
December 31. Switching to the new measurement date will require a one-time adjustment to retained earnings
in 2008 per the transition guidance in SFAS No. 158.
We adopted the funding recognition provisions of SFAS No. 158 in 2006. To properly report the funded status
of our qualified defined benefit pension plan (“Pension Plan”) and nonqualified supplemental defined benefit
pension plan (“Supplemental Pension Plan”) in 2006, we recognized a $5.9 million charge, net of tax benefit of
$3.9 million, in accumulated other comprehensive income principally comprised of $0.3 million of prior service
costs and $5.6 million of actuarial loss. Prior to the adoption of SFAS No. 158, we combined the Pension Plan
and Supplemental Pension Plan for purposes of reporting any net pension asset or obligation. Additionally, upon
adoption of SFAS No. 158, based on the December 31, 2006 plan valuations, we recognized a $2.8 million asset
included in other assets for the Pension Plan and a $4.4 million liability, $0.3 million of which was included
in accrued salaries and wages and $4.1 million of which was included in other liabilities, for the Supplemental
Pension Plan.
Pension assumptions are evaluated each year. Actuarial valuations are used to provide assistance in calculating
the estimated obligations related to our pension plans. 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 includes 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 comprised the plan’s asset mix. While the
studies give appropriate consideration to recent plan performance and historical returns, the assumption for
the expected long-term rate of return is primarily based on our expectation of a long-term, prospective rate of
return.