Best Buy 2015 Annual Report Download - page 57

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Table of Contents
50
Gift Cards – 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 on historical redemption patterns, which show that after 24 months,
we can determine the portion of the liability for which redemption is remote. Our estimate of the amount and timing of
redemptions of gift cards is based primarily on historical data.
Customer Loyalty Programs – We have customer loyalty programs which allow members to earn points for each purchase
completed or when using our co-branded credit cards. 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 certificates is based primarily on historical data.
Service Contracts – 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 consumption of services during the contract term compared with the total estimated services to
be provided over the entire contract. Our estimate of the services consumed under service contracts is based on historical data.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions of
our revenue recognition critical accounting estimates. However, if actual results are not consistent with our estimates or
assumptions, we may be exposed to losses or gains that could be material.
The following table presents the effect on net earnings from a 10% change in each of the estimates described above, as of
January 31, 2015 ($ in millions):
Returns Gift Cards Customer Loyalty Service Contracts
$7 $23 $13 $10
Costs Associated with Vacant Leased Property
From time-to-time we vacate leased stores and other leased properties prior to the expiration of the related lease. For vacated
locations with remaining lease commitments, we record a reserve for the difference between the present value of our future
lease payments and related costs (e.g., real estate taxes and common area maintenance) less expected future sublease rental
income, from the date we cease to use of the property through the end of the lease term.
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 vacant locations 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.
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 vacant 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. A 10% change in our vacant space reserve at January 31, 2015, would have
affected net earnings by approximately $4 million in fiscal 2015.
Stock-Based Compensation
We have a stock-based compensation plan, which includes non-qualified stock options and nonvested share awards. We
determine the fair value of our non-qualified stock option awards using option-pricing models. We determine the fair value of
nonvested share awards with market conditions using Monte-Carlo simulation. We determine the fair value of nonvested share
awards that vest based upon performance or time conditions at the closing market price of our stock, reduced by the present
value of expected dividends during the vesting period where the recipient has no dividend rights. Compensation expense is
recognized over the requisite service period for awards expected to vest. Management's key assumptions are developed with
input from independent third-party valuation advisors.