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47
PART II
Description Judgments and Uncertainties
Effect if Actual Results Differ From
Assumptions
Revenue Recognition
See Note 1, Summary of Significant
Accounting Policies, to theNotes to
Consolidated Financial Statements,
included in Item 8,Financial Statements and
Supplementary Data , of this Annual Report
on Form 10-K, for a complete discussion of
our revenue recognition policies.
We have a customer loyalty program which
allows members to earn points for each
purchase completed at U.S. Best Buy stores
or through our BestBuy.com Web site.
Points earned enable members to receive a
certificate that may be redeemed on future
purchases at U.S. Best Buy stores. Thevalue
of points earned by our loyalty program
members is included in accrued liabilities
and recorded asa reduction in revenue at
the time the points are earned, based on
the retail value of points that are projected
to be redeemed.
We offer rebates that entitle our customers
to receive a reduction in the price of a
product or service. Rebates are recorded as
a reduction in revenue based on the
percentage of rebates that are projected to
be redeemed.
Our revenue recognition accounting
methodology contains uncertainties
because it requires management to make
assumptions regarding and to apply
judgment to estimate the amount and
timing of points projected to be redeemed
by members of our customer loyalty
program and rebate offers projected to be
redeemed by customers. Our estimate of
the amount and timing of points and
rebates projected to be redeemed is based
primarily on historical transaction
experience.
We have not made any material changes in
the accounting methodology used to
recognize revenue for our customer loyalty
and rebate programs during the past three
fiscal years.
We do not believe there is a reasonable
likelihood that there will be a material
change in the future estimates or
assumptions we use to recognize revenue
for our customer loyalty and rebate
programs. However, if actual results are not
consistent with our estimates or
assumptions, we may be exposed to losses
or gains that could be material.
A 10% change in our customer loyalty and
rebate program liabilities at February 25,
2006, would have affected net earnings by
approximately $5 million and $5 million,
respectively, for the fiscal year ended
February 25, 2006.
Costs Associated With Exit Activities
We occasionally vacate storesand other
locations prior to the expiration of the
related lease. For vacated locations that are
under long-term leases, we record an
expense for the difference between our
future lease payments and related costs
(e.g., real estate taxes and common area
maintenance) from the date of closure
through theend of the remaining lease
term, net of expected future sublease rental
income.
Our estimate offuture cash flows is based
on historical experience; our analysis of the
specific real estate market, including input
from independent real estate firms; and
economic conditions that can be difficult to
predict. Cash flows are discounted using a
risk-free interest ratethat coincides with the
remaining lease term.
Our location closing liability contains
uncertainties because management is
required to make assumptions and to apply
judgment to estimate the duration of future
vacancy periods, the amount and timing of
future settlement payments, and the amount
and timing of potential sublease rental
income. When making these assumptions,
management considers a number of factors,
including historical settlement experience,
the owner of the property, the location and
condition of the property, the terms of the
underlying lease, the specific marketplace
demand and general economic conditions.
We have not made any material changes in
the accounting methodology used to
establish our location closing liability during
the past three fiscal years.
We do not believe there is a reasonable
likelihood that there will be a material
change in the estimates or assumptions we
use to calculate our location closing
liability. However, if actual results are not
consistent with our estimates or
assumptions, we may be exposed to losses
or gains that could be material.
A 10% change in our location closing
liability at February 25, 2006, would have
affected net earnings by approximately
$3 million for the fiscal year ended
February 25, 2006.