Big Lots 2013 Annual Report Download - page 193

51
Pension
Pension assumptions are evaluated each year. Actuarial valuations are used to calculate the estimated expenses and obligations
related to our pension plans. We review external data and historical trends to help determine the discount rate and expected
long-term rate of return. Our objective in selecting a discount rate is to identify the best estimate of the rate at which the
benefit obligations would be settled on the measurement date. In making this estimate, we review rates of return on high-
quality, fixed-income investments available at the measurement date and expected to be available during the period to maturity
of the benefits. This process includes a review of the bonds available on the measurement date with a quality rating of Aa or
better. The expected long-term rate of return on assets is derived from detailed periodic studies, which include a review of
asset allocation strategies, anticipated future long-term performance of individual asset classes, risks (standard deviations), and
correlations of returns among the asset classes that comprise the plan's asset mix. While the studies give appropriate
consideration to recent plan performance and historical returns, the assumption for the expected long-term rate of return is
primarily based on our expectation of a long-term, prospective rate of return.
Insurance and Insurance-Related Reserves
We are self-insured for certain losses relating to property, general liability, workers' compensation, and employee medical and
dental benefit claims, a portion of which is paid by employees. We purchase stop-loss coverage to limit significant exposure in
these areas. Accrued insurance-related liabilities and related expenses are based on actual claims filed and estimates of claims
incurred but not reported. The estimated accruals are determined by applying actuarially-based calculations. General liability
and workers' compensation liabilities are recorded at our estimate of their net present value, using a 4% discount rate, while
other liabilities for insurance-related reserves are not discounted.
Fair Value of Financial Instruments
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined
below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest
priority to unobservable inputs.
Level 1, defined as observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2, defined as observable inputs other than Level 1 inputs. These include quoted prices for similar assets or liabilities
in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its
own assumptions.
The carrying value of cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair value
because of the relatively short maturity of these items.
Costs Associated with Exit or Disposal Activities
Our accruals for costs associated with exit or disposal activities primarily consist of contract termination costs, principally
related to operating leases, and severance benefits. The costs arose from our decision to wind down the operations of certain
businesses and/or segments. When determining the valuation of the liabilities for our contract termination cost estimates, we
utilize the advice and input of outside experts who specialize in real estate activities. The accruals for contract termination
costs and severance benefits factor in many variables including, but not limited to, expected vacancy periods, tenancy rates per
square foot, buy-out scenarios, costs of capital, operating performance during the wind down period, and forfeitures.
Additionally, these liabilities have been recorded at their net present value, which represents their fair value. Given the number
of assumptions and the unobservable nature of certain of the inputs, these accruals for costs associated with exit or disposal
activities are considered to be Level 3.
Commitments and Contingencies
We are subject to various claims and contingencies including legal actions and other claims arising out of the normal course of
business. In connection with such claims and contingencies, we estimate the likelihood and amount of any potential obligation,
where it is possible to do so, using management's judgment. Management uses various internal and external specialists to assist
in the estimating process. We accrue, if material, 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 and no accrual is made.