Foot Locker 2007 Annual Report Download - page 53

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37
The effective portion of the gain or loss on hedges of foreign net investments is generally not reclassified to
earnings unless the net investment is disposed of. To the extent derivatives do not qualify as hedges, or are ineffective,
their changes in fair value are recorded in earnings immediately, which may subject the Company to increased earnings
volatility. The changes in the fair value of the Company’s hedges of net investments in various foreign subsidiaries is
computed using the spot method.
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to various market data and other valuation
techniques as appropriate. The carrying value of cash and cash equivalents, and other current receivables and payables
approximates fair value due to the short-term nature of these assets and liabilities. Quoted market prices of the same
or similar instruments are used to determine fair value of long-term debt and forward foreign exchange contracts.
Discounted cash flows are used to determine the fair value of long-term investments and notes receivable if quoted
market prices on these instruments are unavailable.
Income Taxes
On February 4, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). Interpretation No. 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement standard for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. Upon the adoption of
FIN 48, the Company recognized a $1 million increase to retained earnings to reflect the change of its liability for the
unrecognized income tax benefits as required. At February 4, 2007, the total amount of gross unrecognized tax benefits
was $33 million. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax
expense.
The Company determines its deferred tax provision under the liability method, whereby deferred tax assets and
liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets
and liabilities and their reported amounts using presently enacted tax rates. Deferred tax assets are recognized for tax
credits and net operating loss carryforwards, reduced by a valuation allowance, which is established when it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A taxing authority may challenge positions that the Company adopted in its income tax filings. Accordingly,
the Company may apply different tax treatments for transactions in filing its income tax returns than for income tax
financial reporting. The Company regularly assesses its tax position for such transactions and records reserves for
those differences when considered necessary.
Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries is made only on those amounts
in excess of the funds considered to be permanently reinvested.
Pension and Postretirement Obligations
The discount rate selected to measure the present value of the Company’s U.S. benefit obligations as of
February 2, 2008 was derived using a cash flow matching method whereby the Company compares the plans’ projected
payment obligations by year with the corresponding yield on the Citibank Pension Discount Curve. The cash flows
are then discounted to their present value and an overall discount rate is determined. The discount rate selected to
measure the present value of the Company’s Canadian benefit obligations as of February 2, 2008 was developed by using
the plan’s bond portfolio indices which match the benefit obligations.
Insurance Liabilities
The Company is primarily self-insured for health care, workers’ compensation and general liability costs.
Accordingly, provisions are made for the Company’s actuarially determined estimates of discounted future claim costs
for such risks for the aggregate of claims reported and claims incurred but not yet reported. Self-insured liabilities
totaled $17 million and $16 million at February 2, 2008 and February 3, 2007. The Company discounts its workers’
compensation and general liability using a risk-free interest rate. Imputed interest expense related to these liabilities
was $1 million in each of 2007, 2006 and 2005.