Big Lots 2007 Annual Report Download - page 136

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
we evaluate a number of qualitative and quantitative factors, including, but not limited to, proximity to
remaining open stores and estimated sales migration from the closed store to any stores remaining open. The
estimated sales migration is based on historical estimates of our sales migration upon opening or closing a store
in a similar market. For purposes of reporting the operations of stores meeting the criteria for discontinued
operations, we report net sales, gross margin, and related operating costs that are directly related to and
specifically identifiable with respect to those stores’ operations as discontinued operations. Certain corporate-
level charges, such as general office cost, field operations, national advertising, fixed distribution costs, and
interest cost are not allocated to discontinued operations because we believe that these costs are not specific to
the stores’ operations.
Share-Based Compensation
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires all share-based payments to
employees and directors, including grants of stock options, to be recognized in the financial statements based
on their fair values. We adopted SFAS No. 123(R) on January 29, 2006, under the modified prospective method,
in which the requirements of SFAS No. 123(R) are applied to new awards and to previously granted awards
that were not fully vested on the effective date. The modified prospective method did not require restatement
of previous years’ financial statements. We used the short-cut method to determine our beginning excess tax
benefit pool. The benefit of tax deductions in excess of recognized compensation cost is reported as a financing
cash flow rather than as an operating cash flow. We value and expense stock options with graded vesting
as a single award with an average estimated life over the entire term of the award. The expense for options
with graded vesting is recorded straight-line over the vesting period. The fair value of nonvested restricted
stock awards is measured at the grant date and is amortized on a straight-line basis over the vesting period.
Compensation expense for all share-based awards is recognized in selling and administrative expense.
We use a binomial model to estimate the fair value of stock options granted on or after February 1, 2004. The
binomial model takes into account variables such as volatility, dividend yield rate, risk-free rate, contractual
term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the
probability of retirement of the option holder in computing the value of the option. Expected volatility is based
in part on historical and current implied volatilities from traded options on our common shares. The risk-free
rate is based on U.S. Treasury security yields at the time of the grant. The dividend yield on our common shares
is assumed to be zero since we have not paid dividends and have no immediate plans to do so. The expected
life is determined from the binomial model. The model incorporates exercise and post-vesting forfeiture
assumptions based on analysis of historical data.
Compensation expense for performance-based nonvested restricted stock awards is recorded based on the
estimated achievement date of the performance criteria. An estimated target achievement date is determined
at the time of the award based on historical and forecasted performance of similar measures. We monitor the
projected achievement of the performance targets at each reporting period and make prospective adjustments to
the estimated vesting period when our internal models indicate that the estimated achievement date differs from
the date being used to amortize expense.