Big Lots 2014 Annual Report Download - page 127

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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. 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, buy-out scenarios and costs of capital. 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.
Revenue Recognition
We recognize sales at the time the customer takes possession of the merchandise. Sales are recorded net of discounts and
estimated returns and exclude any sales tax. The reserve for merchandise returns is estimated based on our prior return
experience.
We sell gift cards in our stores and issue merchandise credits, typically as a result of customer returns, on stored value cards.
We do not charge administrative fees on unused gift card or merchandise credit balances and our gift cards and merchandise
credits do not expire. We recognize sales revenue related to gift cards and merchandise credits when (1) the gift card or
merchandise credit is redeemed in a sales transaction by the customer or (2) breakage occurs. We recognize gift card and
merchandise credit breakage when we estimate that the likelihood of the card or credit being redeemed by the customer is
remote and we determine that we do not have a legal obligation to remit the value of unredeemed cards or credits to the
relevant regulatory authority. We estimate breakage based upon historical redemption patterns. For 2014, 2013, and 2012, we
recognized in net sales on our consolidated statements of operations breakage of $0.2 million, $0.2 million, and $0.5 million,
respectively, related to unredeemed gift card and merchandise credit balances that had aged at least four years beyond the end
of their original issuance month. The liability for the unredeemed cash value of gift cards and merchandise credits is recorded
in accrued operating expenses.
We offer price hold contracts on merchandise. Revenue for price hold contracts is recognized when the customer makes the
final payment and takes possession of the merchandise. Amounts paid by customers under price hold contracts are recorded in
accrued operating expenses until a sale is consummated.