Big Lots 2008 Annual Report Download - page 104

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return, we recognize tax liabilities (or de-recognize tax assets, as the case may be). A number of years may
elapse before a particular matter, for which we have derecognized a tax benefit, is audited and fully resolved or
clarified. We adjust unrecognized tax benefits and income tax provision in the period in which an uncertain tax
position is effectively or ultimately settled, the statute of limitations expires for the relevant taxing authority to
examine the tax position, or as a result of the evaluation of new information that becomes available.
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 2008 is 6.5%. A 0.5%
decrease in the discount rate 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 2008 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 $0.4 million.
We recognized a charge of $9.3 million, net of tax, to other comprehensive income in 2008, principally as a
result of the decline in value of investments held by the pension trust. As of January 31, 2009, the accumulated
other comprehensive income amount, which was principally unrealized actuarial loss, was $15.3 million, net
of tax. During 2008, we reclassified $0.8 million, pretax, from other comprehensive income to expense in our
consolidated statement of operations. During 2009, and in future periods, we expect to reclassify approximately
$2.6 million from other comprehensive income to expense, assuming we achieve our estimated rate of return
on pension plan investments in future periods. Additionally, in the event that we have future settlement events,
as occurred in 2007 and 2006, we would expect that the expense related to future settlements would be greater
than the $1.3 million and $1.5 million charges in 2007 and 2006, respectively.
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. A 10% change in our self-insured liabilities at January 31, 2009 would have
affected selling and administrative expenses, operating profit, and income from continuing operations before
income taxes by approximately $8 million.
General liability and workers’ compensation liabilities are recorded at our estimate of their net present value,
using a 4.0% discount rate, while other liabilities for insurance reserves are not discounted. A 1.0% change in
the discount rate on these liabilities would have affected selling and administrative expenses, operating profit,
and income from continuing operations before income taxes by approximately $1 million.