Big Lots 2012 Annual Report Download - page 116

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Goodwill
Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the
acquisition date fair values of the assets acquired and the liabilities assumed. While we used our best estimates
and assumptions as a part of the purchase price allocation process to accurately value assets acquired and
liabilities assumed at the acquisition date, our estimates were inherently uncertain and subject to refinement.
As a result, during the second quarter of 2012, which falls within the allowed measurement period, we
recorded adjustments to goodwill in the amount of $1.2 million. These goodwill adjustments, associated with
our acquisition of Big Lots Canada, primarily related to fair value adjustments on our intangible assets and
liabilities associated with the acquired operating leases. The measurement period, which may be up to one year
from the acquisition date, has since lapsed and we do not anticipate any subsequent adjustments, which would
be recorded to our consolidated statements of operations.
On an annual basis, we review our goodwill for potential impairment. We conduct an impairment review which
consists of preparing an estimate of the fair value of our reporting segments using an income approach and a
market approach. Determining the fair value of a reporting segment involves the use of significant estimates
and assumptions. These estimates and assumptions include revenue growth rates and operating margins used
to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions
and determination of appropriate market comparables. We base our estimates of fair value on assumptions we
believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ
from those estimates. We perform our annual impairment testing during our second fiscal quarter of each year.
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 $17.9 million, $25.0 million, and $24.6 million
in 2012, 2011, and 2010, respectively. 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 and those of our peers. 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 forfeiture 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.