Big Lots 2011 Annual Report Download - page 164

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 — Basis of Presentation and Summary of Significant Accounting Policies (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 statements of operations. Accrued interest and penalties are included within the
related tax liability line in the accompanying consolidated balance sheets.
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, changes in a deferred tax valuation allowance, and adjustments of a
deferred tax asset or liability for enacted changes in tax laws or rates.
Pension
Pension assumptions are evaluated each year. Actuarial valuations are used to calculate the estimated expenses
and 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 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 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.