Dollar General 2010 Annual Report Download - page 127

10-K
due to the fact that our stock has been publicly traded for a relatively short period of time in relation
to the expected term of outstanding options. Other factors involving judgments that affect the
expensing of share-based payments include estimated forfeiture rates of share-based awards.
Historically, these estimates have not been materially inaccurate; however, if our estimates differ
materially from actual experience, we may be required to record additional expense or reductions of
expense, which could be material to our future financial results.
Fair Value Measurements. We measure fair value of assets and liabilities in accordance with
applicable accounting standards, which require that fair values be determined based on the assumptions
that market participants would use in pricing the asset or liability. These standards establish a fair value
hierarchy that distinguishes between market participant assumptions based on market data obtained
from sources independent of the reporting entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy). Therefore, Level 3 inputs
are typically based on an entity’s own assumptions, as there is little, if any, related market activity, and
thus require the use of significant judgment and estimates. Currently, we have no assets or liabilities
that are valued based solely on Level 3 inputs.
Our fair value measurements are primarily associated with our derivative financial instruments,
intangible assets, property and equipment, and to a lesser degree our investments. The values of our
derivative financial instruments are determined using widely accepted valuation techniques, including
discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the
contractual terms of the derivatives, including the period to maturity, and uses observable market-based
inputs, including interest rate curves. The fair values of interest rate swaps are determined using the
market standard methodology of netting the discounted future fixed cash payments (or receipts) and
the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments)
are based on an expectation of future interest rates (forward curves) derived from observable market
interest rate curves. In recent years, these methodologies have produced materially accurate valuations.
Derivative Financial Instruments. We account for our derivative instruments in accordance with
accounting standards for derivative instruments (including certain derivative instruments embedded in
other contracts) and hedging activities, as amended and interpreted, which establish accounting and
reporting requirements for such instruments and activities. These standards require that every
derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair
value, and that changes in the derivative’s fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. See ‘‘Fair Value Measurements’’ above for a discussion of derivative
valuations. Special accounting for qualifying hedges allows a derivative’s gains and losses to either offset
related results on the hedged item in the statement of operations or be accumulated in other
comprehensive income, and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. We use derivative instruments to manage
our exposure to changing interest rates, primarily with interest rate swaps.
In addition to making valuation estimates, we also bear the risk that certain derivative instruments
that have been designated as hedges and currently meet the strict hedge accounting requirements may
not qualify in the future as ‘‘highly effective,’’ as defined, as well as the risk that hedged transactions in
cash flow hedging relationships may no longer be considered probable to occur. Further, new
interpretations and guidance related to these instruments may be issued in the future, and we cannot
predict the possible impact that such guidance may have on our use of derivative instruments going
forward.
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