Best Buy 2005 Annual Report Download - page 85

$ in millions, except per share amounts
The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model
with the following assumptions:
2005 2004 2003
Risk-free interest rate(1) 3.4% 3.3% 4.2%
Expected dividend yield 0.9% 0.8% —
Expected stock price volatility(2) 40% 60% 60%
Expected life of stock options(3) 5.5 years 5.5 years 5.0 years
(1) Based on the five-year treasury constant maturity interest rate whose term is consistent with the expected life of our stock options.
(2) Beginning in fiscal 2005, we used an outside valuation advisor to assist us in more accurately projecting the expected stock price
volatility. We considered both historical data and observable market prices of similar equity instruments. Prior to fiscal 2005,
expected stock price volatility was based primarily on historical experience.
(3) We estimate the expected life of stock options based upon historical experience.
The weighted average fair value of stock options granted during fiscal 2005, 2004 and 2003 used in computing pro
forma compensation expense was $21.26, $30.93 and $23.91 per share, respectively.
During fiscal 2003, we changed our method of
Derivative Financial Instruments accounting for vendor allowances in accordance with EITF
SFAS No. 133, Accounting for Derivative Instruments and Issue No. 02-16. Vendor allowances now are considered
Hedging Activities, requires that all derivatives be a reduction in the price of a vendor’s products or services
included on the balance sheet at fair value. Our only and included as a component of cost of goods sold when
derivative financial instrument was an interest rate swap the related product or service is sold, unless the allowance
with a fair value of $1 and $4 as of February 26, 2005, represents a reimbursement of a specific, incremental and
and February 28, 2004, respectively. Our interest rate identifiable cost incurred to sell a vendor’s products or
swap is included in our consolidated balance sheets in services. We continue to record vendor allowances that
long-term debt. On May 2, 2005, we terminated the represent a reimbursement of a specific, incremental and
interest rate swap. identifiable cost incurred to sell a vendor’s products or
services as a reduction of the related cost in SG&A.
Change in Accounting Principles — Goodwill Previously, and in accordance with GAAP, we had
and Vendor Allowances recognized and classified a majority of vendor allowances
The adoption of SFAS No. 142 related to goodwill as a reduction of advertising costs in SG&A. The
described above has been accounted for as a cumulative cumulative effect of the change in our method of
effect of a change in accounting principle and applied accounting for vendor allowances resulted in an after-tax,
cumulatively as if the change had occurred at March 3, noncash charge to net earnings of $50, of which $8 was
2002, the beginning of fiscal 2003. associated with Musicland. The effect of the change on
In September 2002, the EITF released Issue No. 02-16, the fiscal year ended March 1, 2003, was a decrease in
Accounting by a Reseller for Cash Consideration Received net earnings from continuing operations of $1. As
from a Vendor, with final consensus reached in described in Note 2, Discontinued Operations, we have
March 2003. EITF Issue No. 02-16 establishes the classified Musicland’s financial results as discontinued
accounting standards for recording vendor allowances in operations, including the related cumulative effect of the
a retailer’s income statement. change in accounting principle.
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