Big Lots 2007 Annual Report Download - page 139

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
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 paid by employees. We purchase stop-loss
coverage to limit significant exposure in these areas. Accrued insurance-related liabilities and related expenses
are based on actual claims filed and estimates of claims incurred but not reported. The estimated accruals are
determined by applying actuarially-based calculations. 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-related reserves are not discounted.
Fair Value of Financial Instruments
The carrying value of cash equivalents, accounts receivable, accounts payable, and accrued expenses
approximates fair value because of the relative short maturity of these items. The carrying value of our long-
term obligations at February 2, 2008, approximates fair value because the interest rates were variable and
approximate current market rates.
Commitments and Contingencies
We are subject to various claims and contingencies including legal actions and other claims arising out of the
normal course of business. In connection with such claims and contingencies, we estimate the likelihood and
amount of any potential obligation, where it is possible to do so, using management’s judgment. Management used
various internal and external specialists to assist in the estimating process. We accrue, if material, a liability if the
likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome
is only reasonably possible (as opposed to probable), or if it is probable but an estimate is not determinable,
disclosure of a material claim or contingency is made in the notes to our consolidated financial statements.
Revenue Recognition
We recognize sales at the time the customer takes possession of the merchandise. Sales are recorded net of
discounts and estimated returns and excludes any sales tax. The reserve for merchandise returns is estimated
based on our prior return experience.
We sell gift cards to our customers in our retail stores. We do not charge administrative fees on unused gift card
balances and our gift cards do not expire. We recognize sales revenue from gift cards when: (1) the gift card is
redeemed by the customer; or (2) the likelihood of the gift card being redeemed by the customer is remote (“gift
card breakage”) and we determine that we do not have a legal obligation to remit the value of unredeemed gift
cards to the relevant jurisdictions. We determine our gift card breakage rate based upon historical redemption
patterns. Gift card breakage income of $0.3 million is included in the 2007 net sales on our consolidated
statements of operations. The liability for the unredeemed cash value of gift cards is recorded in accrued
operating expenses.
We offer price hold contracts on selected furniture merchandise. Revenue for price hold contracts is recognized
when the customer makes the final payment and takes possession of the merchandise. Amounts paid by
customers under price hold contracts are recorded in accrued operating expenses until a sale is consummated.