Dollar General 2010 Annual Report Download - page 126

10-K
Contingent Liabilities—Legal Matters. We are subject to legal, regulatory and other proceedings
and claims. We establish liabilities as appropriate for these claims and proceedings based upon the
probability and estimability of losses and to fairly present, in conjunction with the disclosures of these
matters in our financial statements and SEC filings, management’s view of our exposure. We review
outstanding claims and proceedings with external counsel to assess probability and estimates of loss. We
re-evaluate these assessments on a quarterly basis or as new and significant information becomes
available to determine whether a liability should be established or if any existing liability should be
adjusted. The actual cost of resolving a claim or proceeding ultimately may be substantially different
than the amount of the recorded liability. In addition, because it is not permissible under U.S. GAAP
to establish a litigation liability until the loss is both probable and estimable, in some cases there may
be insufficient time to establish a liability prior to the actual incurrence of the loss (upon verdict and
judgment at trial, for example, or in the case of a quickly negotiated settlement).
Lease Accounting and Excess Facilities. Many of our stores are subject to build-to-suit
arrangements with landlords, which typically carry a primary lease term of 10-15 years with multiple
renewal options. We also have stores subject to shorter-term leases (usually with initial or current terms
of 3 to 5 years), and many of these leases have multiple renewal options. As of January 28, 2011,
approximately 35% of our stores had provisions for contingent rentals based upon a percentage of
defined sales volume. We recognize contingent rental expense when the achievement of specified sales
targets is considered probable. We recognize rent expense over the term of the lease. We record
minimum rental expense on a straight-line basis over the base, non-cancelable lease term commencing
on the date that we take physical possession of the property from the landlord, which normally includes
a period prior to store opening to make necessary leasehold improvements and install store fixtures.
When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related
rent expense on a straight-line basis and record the difference between the recognized rental expense
and the amounts payable under the lease as deferred rent. Tenant allowances, to the extent received,
are recorded as deferred incentive rent and amortized as a reduction to rent expense over the term of
the lease. We reflect as a liability any difference between the calculated expense and the amounts
actually paid. Improvements of leased properties are amortized over the shorter of the life of the
applicable lease term or the estimated useful life of the asset.
For store closures (excluding those associated with a business combination) where a lease
obligation still exists, we record the estimated future liability associated with the rental obligation on
the date the store is closed in accordance with accounting standards for costs associated with exit or
disposal activities. Based on an overall analysis of store performance and expected trends, management
periodically evaluates the need to close underperforming stores. Liabilities are established at the point
of closure for the present value of any remaining operating lease obligations, net of estimated sublease
income, and at the communication date for severance and other exit costs. Key assumptions in
calculating the liability include the timeframe expected to terminate lease agreements, estimates related
to the sublease potential of closed locations, and estimation of other related exit costs. Historically,
these estimates have not been materially inaccurate; however, if actual timing and potential termination
costs or realization of sublease income differ from our estimates, the resulting liabilities could vary
from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.
Share-Based Payments. Our share-based stock option awards are valued on an individual grant
basis using the Black-Scholes-Merton closed form option pricing model. We believe that this model
fairly estimates the value of our share-based awards. The application of this valuation model involves
assumptions that are judgmental and highly sensitive in the valuation of stock options, which affects
compensation expense related to these options. These assumptions include an estimate of the fair value
of our common stock, the term that the options are expected to be outstanding, an estimate of the
volatility of our stock price (which is based on a peer group of publicly traded companies), applicable
interest rates and the dividend yield of our stock. Our volatility estimates are based on a peer group
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