Foot Locker 2008 Annual Report Download - page 53

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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. 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
January 31, 2009 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 January 31, 2009 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 $16 million and $17 million at January 31, 2009 and February 2, 2008, respectively. The Company discounts its
workers’ compensation and general liability using a risk-free interest rate. Imputed interest expense related to these
liabilities was not significant for the year ended January 31, 2009 and was $1 million in both 2007 and 2006.
Accounting for Leases
The Company recognizes rent expense for operating leases as of the possession date for store leases or the
commencement of the agreement for a non-store lease. Rental expense, inclusive of rent holidays, concessions
and tenant allowances are recognized over the lease term on a straight-line basis. Contingent payments based
upon sales and future increases determined by inflation related indices cannot be estimated at the inception of the
lease and accordingly, are charged to operations as incurred.