Best Buy 2014 Annual Report Download - page 55

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50
rate in the period of resolution. A favorable tax settlement may reduce our effective income tax rate and would be recognized in
the period of resolution.
Revenue Recognition
The following accounting estimates relating to revenue recognition contain uncertainty because they require management to
make assumptions and to apply judgment regarding the effects of future events.
We sell gift cards to customers in our retail stores, through our websites and through selected third parties. A liability is initially
established for the value of the gift card. We recognize revenue from gift cards when: (i) the card is redeemed by the customer,
or (ii) the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). We determine our gift
card breakage rate based upon historical redemption patterns, which show that after 24 months, we can determine the portion of
the liability for which redemption is remote.
We have customer loyalty programs which allow members to earn points for each purchase completed or when using our co-
branded credit cards in the U.S. and Canada. Points earned enable members to receive a certificate that may be redeemed on
future purchases. The value of points earned by our loyalty program members is included in accrued liabilities and recorded as
a reduction in revenue at the time the points are earned, based on the value of points that are projected to be redeemed.
Our estimate of the amount and timing of redemptions of gift cards and certificates is based primarily on historical transaction
experience, and our estimate of the services consumed under service contracts is based on historical usage rates. 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 gift cards, customer loyalty programs or service contracts. 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 gift card breakage rate at February 1, 2014, would have affected net earnings by approximately
$25 million in fiscal 2014.
A 10% change in our customer loyalty program redemption rate at February 1, 2014, would have affected net earnings by
approximately $12 million in fiscal 2014.
We also sell service contracts for technical support, maintenance and other programs. Revenue on service contracts is deferred
at the time of purchase and recognized either (i) ratably over the term of the contract, or (ii) under a utilization model based on
the percentage of services consumed during the contract term compared with the total estimated services to be provided over
the entire contract.
A 10% change in our deferred revenue balance related to service contracts at February 1, 2014, would have affected net
earnings by approximately $9 million in fiscal 2014.
Costs Associated with Vacant Leased Property
From time-to-time we vacate stores and other locations prior to the expiration of the related lease. For vacated locations with
remaining lease commitments, we record an expense for the difference between the present value of our future lease payments
and related costs (e.g., real estate taxes and common area maintenance) from the date we cease to use the location through the
end of the remaining lease term, net of expected future sublease rental income.
Our estimate of future 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. Cash flows are discounted using a risk-free interest rate that
coincides with the remaining lease term.
The liability recorded for location closures involves uncertainty 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 experience, the location and condition of the property, the terms of the underlying lease, the
specific marketplace demand and general economic conditions.
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 closed location 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.