Big Lots 2007 Annual Report Download - page 124

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Contingencies
We are subject to various claims and contingencies including legal actions, lease termination obligations on
closed stores, lease indemnification obligations on KB Toys stores, and other claims arising out of the normal
course of our business. In connection with such claims and contingencies, we estimate the likelihood and
amounts, where possible to do so, of any potential obligation using management’s judgment. Management uses
various internal and external specialists to assist in the estimating process; however, the ultimate outcome of the
various claims and contingencies could be materially different from management’s estimates, and adjustments
to income could be required. With respect to the lease termination obligations and lease indemnification
obligations, we consider the remaining minimum lease payments, estimated sublease rentals that could be
reasonably obtained, and other potentially mitigating factors. As market conditions or other factors change,
the estimate of the obligations could be materially different. We continually evaluate the adequacy of our
recorded obligations for claims and contingences based on current information, including settlement amounts of
individual lease obligations compared to recorded contractual obligations. We accrue a liability if the likelihood
of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only
reasonably possible (as opposed to probable), or, if it is probable but an estimate is not determinable, disclosure
of a material claim or contingency is made in the notes to our consolidated financial statements. In addition,
because it is not permissible to establish a litigation reserve until the loss is both probable and estimable, in
some cases there may be insufficient time to establish a reserve prior to the actual incurrence of the loss (upon
verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement).
Revenue Recognition
We recognize sales at the time the customer takes possession of the merchandise. Sales are recorded net of
discounts and estimated returns and excludes any sales tax. The reserve for merchandise returns is estimated
based on our prior return experience.
We sell gift cards to our customers in our retail stores. We do not charge administrative fees on unused gift card
balances and our gift cards do not expire. We recognize sales revenue from gift cards when: (1) the gift card is
redeemed by the customer; or (2) the likelihood of the gift card being redeemed by the customer is remote (“gift
card breakage”) and we determine that we do not have a legal obligation to remit the value of unredeemed gift
cards to the relevant jurisdictions. We determine our gift card breakage rate based upon historical redemption
patterns. Gift card breakage income of $0.3 million is included in the 2007 net sales on our consolidated
statements of operations. The liability for the unredeemed cash value of gift cards is recorded in accrued
operating expenses.
We offer price hold contracts on selected furniture merchandise. Revenue for price hold contracts is recognized
when the customer makes the final payment and takes possession of the merchandise. Amounts paid by
customers under price hold contracts are recorded in accrued operating expenses until a sale is consummated.
Lease Accounting
Rent expense is recognized over the term of the lease. We recognize minimum rent starting when possession of
the property is taken from the landlord, which normally includes a construction period prior to store opening.
When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent
expense on a straight-line basis and record the difference between the recognized rental expense and the
amounts payable under the lease as deferred incentive rent. We also receive tenant allowances, which are
recorded in deferred rent and are amortized as a reduction to rent expense over the term of the lease. In order to
properly recognize rent expense on our leases, we must properly identify the lease term. The lease term is the
minimum contractually obligated period over which we have control of the property. Our leases generally have
renewal options that extend beyond the original minimum lease period; however, these lease option periods are
ignored for the purpose of calculating straight-line rent or amortizing any deferred rent.
From time to time we modify lease terms with existing or new landlords, including but not limited to,
modifications due to a change in ownership of the property, modifications requiring us to change locations
within a shopping center, early terminations, and other modifications. In these cases, we assess whether
a significant modification has occurred and if so, determine the appropriate accounting for the applicable
components of deferred rent associated with that lease.