Big Lots 2009 Annual Report Download - page 151

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Our significant accounting policies, including the recently adopted accounting standards and recent accounting
standards – future adoptions, are described in note 1 to the accompanying consolidated financial statements.
We believe the following assumptions and estimates are the most critical to understanding and evaluating our
reported financial results. Management has reviewed these critical accounting estimates and related disclosures
with the Audit Committee of our Board of Directors.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory
method. Market is determined based on the estimated net realizable value, which generally is the merchandise
selling price at or near the end of the reporting period. The average cost retail inventory method requires
management to make judgments and contains estimates, such as the amount and timing of markdowns to clear
slow-moving inventory, the estimated allowance for shrinkage, and the estimated amount of excess or obsolete
inventory, which may impact the ending inventory valuation and prior or future gross margin. These estimates
are based on historical experience and current information.
When management determines the salability of merchandise inventories is diminished, markdowns for
clearance activity and the related cost impact are recorded at the time the price change decision is made. Factors
considered in the determination of markdowns include current and anticipated demand, customer preferences,
the age of merchandise, and seasonal trends. Timing of holidays within fiscal periods, weather, and customer
preferences could cause material changes in the amount and timing of markdowns from year to year.
The inventory allowance for shrinkage is recorded as a reduction to inventories, charged to cost of sales, and
calculated as a percentage of sales for the period from the last physical inventory date to the end of the reporting
period. Such estimates are based on our historical and current year inventory results. Independent physical
inventory counts are taken at each store once a year. During 2010, the majority of these counts occur between
January and September. As physical inventories are completed, actual results are recorded and new go-forward
shrink accrual rates are established based on individual store historical results. Thus, the shrink accrual rate
will be adjusted throughout the January through September inventory cycle based on actual results. At January
30, 2010, a 10% difference in our shrink reserve would have affected gross margin, operating profit and
income from continuing operations before income taxes by approximately $4 million. While it is not possible
to quantify the impact from each cause of shrinkage, we have loss prevention programs and policies aimed at
minimizing shrinkage.
Long-Lived Assets
Our long-lived assets primarily consist of property and equipment. We perform annual impairment reviews of
our long-lived assets at the store level. When we perform the annual impairment reviews, we first determine
which stores had impairment indicators present. We use actual historical cash flows to determine which stores
had negative cash flows in each of the past two years (on a rolling basis). For each store with two years of
negative cash flows, we obtain future cash flow estimates based on operating performance estimates specific
to each store’s operations that are based on assumptions currently being used to develop our company level
operating plans. If the net book value of a store’s long-lived assets is not recoverable by the expected future
cash flows of the store, we estimate the fair value of the store’s assets and recognize an impairment charge for
the excess net book value of the store’s long-lived assets over their fair value. The fair value of store assets is
estimated based on information available in the marketplace for similar assets.
We recognized impairment charges of $0.4 million, $0.1 million, and $0.8 million in 2009, 2008, and 2007,
respectively. We believe that our impairment charges are trending lower because we closed a number of
underperforming stores at the end of 2005, and continued to close (primarily through non-renewal of leases)
underperforming stores in 2007, 2008, and 2009. We only identified four stores with impairment indicators as
a result of our annual store impairment tests in 2009 and we recognized impairment charges on those stores.
Therefore, we do not believe that varying the assumptions used to test for recoverability to estimate fair
value of our long-lived assets would have a material impact on the impairment charges we incurred in 2009.
However, if our future operating results decline significantly, we may be exposed to impairment losses that
could be material (for additional discussion of this risk, see “Item 1A. Risk Factors – A significant decline in
our operating profit and taxable income may impair our ability to realize the value of our long lived assets and
deferred tax assets.”).