Big Lots 2011 Annual Report Download - page 165

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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)
Fair Value of Financial Instruments
The fair value hierarchy 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.
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.
Commitments and Contingencies
We are subject to various claims and contingencies including legal actions and other claims arising out of the
normal course of business. In connection with such claims and contingencies, we estimate the likelihood and
amount of any potential obligation, where it is possible to do so, using management’s judgment. Management
used various internal and external specialists to assist in the estimating process. We accrue, if material, a
liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an
adverse outcome is only reasonably possible (as opposed to probable), or if it is probable but an estimate is not
determinable, disclosure of a material claim or contingency is made in the notes to our consolidated financial
statements and no accrual is made.
Revenue Recognition
We recognize sales at the time the customer takes possession of the merchandise. Sales are recorded net of
discounts and estimated returns and exclude any sales tax. The reserve for merchandise returns is estimated
based on our prior return experience.
We sell gift cards in our stores and issue merchandise credits, typically as a result of customer returns, on
stored value cards. We do not charge administrative fees on unused gift card or merchandise credit balances
and our gift cards and merchandise credits do not expire. We recognize sales revenue from gift cards and
merchandise credits when (1) the gift card or merchandise credit is redeemed in a sales transaction by the
customer or (2) breakage occurs. We recognize gift card and merchandise credit breakage when we estimate
that the likelihood of the card or credit being redeemed by the customer is remote and we determine that we do
not have a legal obligation to remit the value of unredeemed cards or credits to the relevant regulatory authority.
We estimate breakage based upon historical redemption patterns. For 2011, 2010, and 2009, we recognized in
net sales on our consolidated statements of operations breakage of $0.6 million, $0.7 million, and $0.6 million,
respectively, related to unredeemed gift card and merchandise credit balances that had aged at least four years
beyond the end of their original issuance month. The liability for the unredeemed cash value of gift cards and
merchandise credits is recorded in accrued operating expenses.
We offer price hold contracts on merchandise. Revenue for price hold contracts is recognized when the customer
makes the final payment and takes possession of the merchandise. Amounts paid by customers under price hold
contracts are recorded in accrued operating expenses until a sale is consummated.