Best Buy 2014 Annual Report Download - page 72

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Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. We
record a valuation allowance to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets
will not be realized.
In determining our provision for income taxes, we use an annual effective income tax rate based on annual income, permanent
differences between book and tax income, and statutory income tax rates. The effective income tax rate also reflects our
assessment of the ultimate outcome of tax audits. We adjust our annual effective income tax rate as additional information on
outcomes or events becomes available. Discrete events, such as audit settlements or changes in tax laws, are recognized in the
period in which they occur.
Our income tax returns are periodically audited by U.S. federal, state and local and foreign tax authorities. At any one time,
multiple tax years are subject to audit by the various tax authorities. In evaluating the tax benefits associated with our various
tax filing positions, we record a tax benefit for uncertain tax positions using the highest cumulative tax benefit that is more
likely than not to be realized. A number of years may elapse before a particular matter, for which we have established a liability,
is audited and effectively settled. We adjust our liability for unrecognized tax benefits in the period in which we determine the
issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine
the tax position or when more information becomes available. We include our liability for unrecognized tax benefits, including
accrued penalties and interest, in accrued income taxes and long-term liabilities on our Consolidated Balance Sheets and in
income tax expense in our Consolidated Statements of Earnings.
Accrued Liabilities
The major components of accrued liabilities at February 1, 2014, and February 2, 2013, were state and local tax liabilities, rent-
related liabilities including accrued real estate taxes, loyalty program liabilities and self-insurance reserves.
Long-Term Liabilities
The major components of long-term liabilities at February 1, 2014, and February 2, 2013, were unrecognized tax benefits, rent-
related liabilities, deferred compensation plan liabilities, self-insurance reserves and deferred revenue.
Foreign Currency
Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at our
consolidated balance sheet date. For operations reported on a one-month lag, we use the exchange rates in effect one month
prior to our consolidated balance sheet date. Results of operations and cash flows are translated using the average exchange
rates throughout the period. The effect of exchange rate fluctuations on the translation of assets and liabilities is included as a
component of shareholders' equity in accumulated other comprehensive income. Gains and losses from foreign currency
transactions, which are included in SG&A, have not been significant in any of the periods presented.
Revenue Recognition
Our revenue arises primarily from sales of merchandise and services. We also record revenue from sales of service contracts,
extended warranties, other commissions and credit card programs. Revenue excludes sales taxes collected.
We recognize revenue when the sales price is fixed or determinable, collection is reasonably assured and the customer takes
possession of the merchandise, or in the case of services, the service has been provided. Revenue is recognized for store sales
when the customer receives and pays for the merchandise. For online sales, we defer revenue and the related product costs for
shipments that are in-transit to the customer, and recognize revenue at the time the customer receives the product. Online
customers typically receive goods within a few days of shipment. Revenue from merchandise sales and services is reported net
of sales returns, including an estimate of future returns based on historical return rates, with a corresponding reduction to cost
of sales. Our sales returns reserve was $13 million and $14 million at February 1, 2014, and February 2, 2013, respectively.
We sell service contracts and extended warranties that typically have terms ranging from three months to four years. We also
receive commissions for customer subscriptions with various third parties, notably from mobile phone network operators. In