Dollar General 2011 Annual Report Download - page 150

10-K
renewal options. As of February 3, 2012, approximately 26% of our stores had provisions for contingent
rentals based upon a percentage of defined sales volume. We recognize contingent rental expense when
the achievement of specified sales targets is considered probable. We recognize rent expense over the
term of the lease. We record minimum rental expense on a straight-line basis over the base,
non-cancelable lease term commencing on the date that we take physical possession of the property
from the landlord, which normally includes a period prior to store opening to make necessary leasehold
improvements and install store fixtures. When a lease contains a predetermined fixed escalation of the
minimum rent, we recognize the related rent expense on a straight-line basis and record the difference
between the recognized rental expense and the amounts payable under the lease as deferred rent.
Tenant allowances, to the extent received, are recorded as deferred incentive rent and amortized as a
reduction to rent expense over the term of the lease. We reflect as a liability any difference between
the calculated expense and the amounts actually paid. Improvements of leased properties are amortized
over the shorter of the life of the applicable lease term or the estimated useful life of the asset.
For store closures (excluding those associated with a business combination) where a lease
obligation still exists, we record the estimated future liability associated with the rental obligation on
the date the store is closed in accordance with accounting standards for costs associated with exit or
disposal activities. Based on an overall analysis of store performance and expected trends, management
periodically evaluates the need to close underperforming stores. Liabilities are established at the point
of closure for the present value of any remaining operating lease obligations, net of estimated sublease
income, and at the communication date for severance and other exit costs. Key assumptions in
calculating the liability include the timeframe expected to terminate lease agreements, estimates related
to the sublease potential of closed locations, and estimation of other related exit costs. Historically,
these estimates have not been materially inaccurate; however, if actual timing and potential termination
costs or realization of sublease income differ from our estimates, the resulting liabilities could vary
from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.
Share-Based Payments. Our share-based stock option awards are valued on an individual grant
basis using the Black-Scholes-Merton closed form option pricing model. We believe that this model
fairly estimates the value of our share-based awards. The application of this valuation model involves
assumptions that are judgmental and highly sensitive in the valuation of stock options, which affects
compensation expense related to these options. These assumptions include an estimate of the fair value
of our common stock, the term that the options are expected to be outstanding, the historical volatility
of our stock price, applicable interest rates and the dividend yield of our stock. Other factors involving
judgments that affect the expensing of share-based payments include estimated forfeiture rates of
share-based awards. Historically, these estimates have not been materially inaccurate; however, if our
estimates differ materially from actual experience, we may be required to record additional expense or
reductions of expense, which could be material to our future financial results.
Fair Value Measurements. We measure fair value of assets and liabilities in accordance with
applicable accounting standards, which require that fair values be determined based on the assumptions
that market participants would use in pricing the asset or liability. These standards establish a fair value
hierarchy that distinguishes between market participant assumptions based on market data obtained
from sources independent of the reporting entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy). Therefore, Level 3 inputs
are typically based on an entity’s own assumptions, as there is little, if any, related market activity, and
thus require the use of significant judgment and estimates. Currently, we have no assets or liabilities
that are valued based solely on Level 3 inputs.
Our fair value measurements are primarily associated with our derivative financial instruments,
intangible assets, property and equipment, and to a lesser degree our investments. The values of our
derivative financial instruments are determined using widely accepted valuation techniques, including
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