Big Lots 2010 Annual Report Download - page 108

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operating plans. If the net book value of a store’s long-lived assets is not recoverable through 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 less than $0.1 million, $0.4 million, and $0.1 million in 2010, 2009, and
2008, respectively. We believe that our impairment charges are trending lower because we closed a number
of underperforming stores at the end of 2005, we have continued to close (primarily through non-renewal
of leases) underperforming stores since that time, and our store productivity continues to improve. We only
identified one store with impairment indicators as a result of our annual store impairment tests in 2010 and we
recognized impairment charges on that store. 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 2010. 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.”).
In addition to our annual store impairment reviews, we evaluate our long-lived assets at each reporting period
to determine whether impairment indicators are present. In 2008, we recorded impairment to the assets of one
store as a result of a casualty loss due to hurricane damage. The amount of this impairment is included in the
$0.1 million 2008 impairment charge discussed above.
Share-Based Compensation
We grant stock options and performance-based non-vested restricted stock to our employees under shareholder
approved incentive plans. Share-based compensation expense was $24.6 million, $20.3 million, and $15.5
million in 2010, 2009, and 2008, respectively. Share-based compensation expense was higher principally due
to 2010 restricted stock awards having a higher fair value than prior year awards, based on our higher stock
price in March 2010 as compared to March 2009 and 2008. Future share-based compensation expense for
performance-based non-vested restricted stock is dependent upon the future number of awards, fair value of our
common shares on the grant date, and the estimated vesting period. Future share-based compensation expense
for stock options is dependent upon the number and terms of future stock option awards and many estimates,
judgments and assumptions used in arriving at the fair value of stock options. Future share-based compensation
expense related to performance-based non-vested restricted stock and stock options may vary materially from
the currently amortizing awards.
We estimate the fair value of our stock options using a binomial model. The binomial model takes into account
estimates, assumptions, and judgments about our stock price volatility, our dividend yield rate, the risk-free rate
of return, the 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 on historical and current implied volatilities from traded options on our common
shares. The dividend yield rate on our common shares is assumed to be zero since we have not paid dividends
and have no current plans to do so. The risk-free rate is based on U.S. Treasury security yields at the time of
the grant. The expected life is determined from the application of the binomial model and includes assumptions
such as the expected employee exercise behavior and our expected turnover rate, which is based on analysis of
historical data.
Compensation expense for performance-based non-vested restricted stock awards is recorded over the estimated
vesting period 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 achievement of the performance targets at each reporting period and make
adjustments to the estimated vesting period when our models indicate that the estimated achievement date
differs from the date being used to amortize expense. Any change in the estimated vesting date results in a
prospective change to the related expense by charging the remaining unamortized expense over the remaining
expected vesting period at the date the estimate was changed.