Big Lots 2008 Annual Report Download - page 118

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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.
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
SFAS No. 157, Fair Value Measurements, establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs.
Level 1, defined as observable inputs such as unadjusted quoted prices in active markets for identical
assets or liabilities.
Level 2, defined as observable inputs other than Level 1 inputs. These include quoted prices for similar
assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that
are not active, or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an
entity to develop its own assumptions.
In connection with our nonqualified deferred compensation plan, we had mutual fund investments of $10.5
million and $13.0 million at January 31, 2009 and February 2, 2008, respectively, which were recorded in
other assets. These investments were classified as trading securities and were recorded at their fair value. The
$10.5 million fair value of mutual fund investments was a Level 1 valuation under the SFAS No. 157 hierarchy
because each fund’s quoted market value per share was available in an active market.
The carrying value of cash equivalents, accounts receivable, accounts payable, and accrued expenses
approximates fair value because of the relatively short maturity of these items. The carrying value of our
obligations under bank credit facility at January 31, 2009 and February 2, 2008, approximates fair value because
the interest rates were variable and approximated current market rates.
Note 1 — Summary of Significant Accounting Policies (Continued)