Big Lots 2008 Annual Report Download - page 116

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Closed Store Accounting
We recognize an obligation for the fair value of lease termination costs when we cease using the leased property
in our operations. In measuring fair value of these lease termination obligations, we consider the remaining
minimum lease payments, estimated sublease rentals that could be reasonably obtained, and other potentially
mitigating factors. We discount the estimated obligation using the applicable credit adjusted interest rate,
resulting in accretion expense in periods subsequent to the period of initial measurement. We monitor the
estimated obligation for lease termination liabilities in subsequent periods and revise any estimated liabilities,
if necessary. Severance and benefits associated with terminating employees from employment are recognized
ratably from the communication date through the estimated future service period, unless the estimated future
service period is less than 60 days, in which case we recognize the impact at the communication date. Generally
all other store closing costs are recognized when incurred.
We classify the results of operations of closed stores to discontinued operations when the operations and cash
flows of the stores have been (or will be) eliminated from ongoing operations and we no longer have any
significant continuing involvement in the operations associated with the stores after closure. We generally meet
the second criteria on all closed stores as, upon closure, operations cease and we have no continuing involvement.
To determine if cash flows have been (or will be) eliminated from ongoing operations, we evaluate a number of
qualitative and quantitative factors, including, but not limited to, proximity of a closing store to any remaining
open stores and the estimated sales migration from the closed store to any stores remaining open. The estimated
sales migration is based on historical estimates of our sales migration upon opening or closing a store in a similar
market. For purposes of reporting closed stores as discontinued operations, we report net sales, gross margin,
and related operating costs that are directly related to and specifically identifiable with respect to the stores’
operations identified as discontinued operations. Certain corporate-level charges, such as general office cost,
field operations, national advertising, fixed distribution costs, and interest cost are not allocated to closed stores
discontinued operations because we believe that these costs are not specific to the stores’ operations.
Share-Based Compensation
We adopted SFAS No. 123(R), Share-Based Payments, on January 29, 2006, under the modified prospective
method, in which the requirements of SFAS No. 123(R) were applied to new awards and to previously granted
awards that were not fully vested on the effective date. Compensation expense is recognized in selling and
administrative expense in our consolidated statements of operations for all options that we expect to vest. We
estimate forfeitures based on historical information.
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. We estimate the fair value of stock options using a binomial model. 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 on historical and current implied volatilities from
traded options on our common shares. 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 risk-free rate is based on U.S. Treasury security
yields at the time of the grant. The expected life is determined from the binomial model, which 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 fair value
of the award on the grant date and 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.
Note 1 — Summary of Significant Accounting Policies (Continued)