Foot Locker 2011 Annual Report Download - page 50

The Company’s review of goodwill did not result in any impairment charges for the years ended
January 28, 2012 and January 29, 2011 as the fair value of each of the reporting units substantially exceeds
its carrying value.
The Company recorded impairment charges of $5 million and $10 million in 2011 and 2010, respectively,
related to its CCS tradename, primarily as a result of reduced revenue projections for this business.
Share-Based Compensation
The Company estimates the fair value of options granted using the Black-Scholes option pricing model. The
Company estimates the expected term of options granted using its historical exercise and post-vesting
employment termination patterns, which the Company believes are representative of future behavior.
Changing the expected term by one year changes the fair value by 7 to 9 percent depending if the change
was an increase or decrease to the expected term. The Company estimates the expected volatility of its
common stock at the grant date using a weighted-average of the Company’s historical volatility and
implied volatility from traded options on the Company’s common stock. A 50 basis point change in
volatility would have a 1 percent change to the fair value. The risk-free interest rate assumption is
determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities
similar to those of the expected term of the award being valued. The expected dividend yield is derived
from the Company’s historical experience. A 50 basis point change to the dividend yield would change the
fair value by approximately 4 percent. The Company records stock-based compensation expense only for
those awards expected to vest using an estimated forfeiture rate based on its historical pre-vesting
forfeiture data, which it believes are representative of future behavior, and periodically will revise those
estimates in subsequent periods if actual forfeitures differ from those estimates. The Black-Scholes option
pricing valuation model requires the use of subjective assumptions. Changes in these assumptions can
materially affect the fair value of the options. The Company may elect to use different assumptions under
the Black-Scholes option pricing model in the future if there is a difference between the assumptions used
and the actual factors that become known over time.
Pension and Postretirement Liabilities
The Company determines its obligations for pension and postretirement liabilities based upon
assumptions related to discount rates, expected long-term rates of return on invested plan assets, salary
increases, age, and mortality, among others. Management reviews all assumptions annually with its
independent actuaries, taking into consideration existing and future economic conditions and the
Company’s intentions with regard to the plans.
Long-Term Rate of Return Assumption — The expected rate of return on plan assets is the long-term rate
of return expected to be earned on the plans’ assets and is recognized as a component of pension expense.
The rate is based on the plans’ weighted-average target asset allocation, as well as historical and future
expected performance of those assets. The target asset allocation is selected to obtain an investment
return that is sufficient to cover the expected benefit payments and to reduce future contributions by the
Company. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to
reflect changes in the financial markets and our investment strategy. The weighted-average long-term rate
of return used to determine 2011 pension expense was 6.59 percent. A decrease of 50 basis points in the
weighted-average expected long-term rate of return would have increased 2011 pension expense by
approximately $3 million. The actual return on plan assets in a given year typically differs from the
expected long-term rate of return, and the resulting gain or loss is deferred and amortized into expense
over the average life expectancy of its inactive participants.
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