Dollar General 2012 Annual Report Download - page 127

10-K
Contingent Liabilities—Income Taxes. Income tax reserves are determined using the methodology
established by accounting standards relating to uncertainty in income taxes. These standards require
companies to assess each income tax position taken using a two-step process. A determination is first
made as to whether it is more likely than not that the position will be sustained, based upon the
technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the
more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is
greater than 50% likely to be realized upon ultimate settlement of the respective tax position.
Uncertain tax positions require determinations and estimated liabilities to be made based on provisions
of the tax law which may be subject to change or varying interpretation. If our determinations and
estimates prove to be inaccurate, the resulting adjustments could be material to our future financial
results.
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,
which includes an analysis of whether such loss estimates are probable, reasonably possible, or remote.
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 and many of these leases have
renewal options. Certain of our stores have 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,
48