Big Lots 2008 Annual Report Download - page 117

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial statement basis and tax basis of assets and liabilities using enacted law and tax rates
in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We assess the adequacy and need for a valuation allowance for deferred tax assets. In making such
determination, we consider all available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.
We have established a valuation allowance to reduce our deferred tax assets to the balance that is more likely
than not to be realized.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in
the accompanying consolidated statement of operations. Accrued interest and penalties are included within the
related tax liability line in the accompanying consolidated balance sheet.
The effective income tax rate in any period may be materially impacted by the overall level of income (loss)
before income taxes, the jurisdictional mix and magnitude of income (loss), changes in the income tax laws
(which may be retroactive to the beginning of the fiscal year), subsequent recognition, de-recognition and/or
measurement of an uncertain tax benefit in accordance with FIN No. 48, changes in a deferred tax valuation
allowance, and adjustments of a deferred tax asset or liability for enacted changes in tax laws or rates.
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.
In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48. FSP FIN 48-1 provides guidance on how to determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 was
effective retroactively to February 4, 2007. The implementation of this standard did not have a material impact
on our financial condition, results of operations, or liquidity.
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 required 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. We
adopted these funding and recognition provisions of SFAS No. 158 in 2006. Upon adoption, 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, 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”). See Recently Adopted Accounting Pronouncements section
later in this footnote for discussion of the measurement date provisions of SFAS No. 158 adopted by us in 2008.
Note 1 — Summary of Significant Accounting Policies (Continued)