Best Buy 2007 Annual Report Download - page 86

$ in millions, except per share amounts
71
PART II
The table below illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation in fiscal 2005:
Net earnings, as reported $ 984
Add: Stock-based compensation income included in reported net earnings, net of tax(1) (1)
Deduct: Stock-based compensation expense determined under fair value method for all awards, net of tax(2) (60)
Net earnings, pro forma $923
Earnings per share:
Basic — as reported $2.01
Basic — pro forma $1.89
Diluted — as reported $1.96
Diluted — pro forma $1.87
(1) Amount represents the stock-based compensation costs, net of tax, recognized under APB Opinion No. 25.
(2) In the fourth quarter of fiscal 2005, we increased our expected participant stock option forfeiture rate as a result of transferring to a
third-party provider certain corporate employees, and the departure of certain senior executives. This higher level of expected stock
option forfeitures reduced our fiscal 2005 pro forma stock-based compensation expense. Fiscal 2005 pro forma stock-based
compensation expense may not be indicative of future stock-based compensation expense.
The weighted-average fair value of stock options granted during fiscal 2005 used in computing pro forma compensation
expense was $14.18 per share. The fair value of each stock option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions in fiscal 2005:
Risk-free interest rate(1) 3.4%
Expected dividend yield 0.9%
Expected stock price volatility(2) 40%
Expected life of stock options(3) 5.5 years
(1) Based on the five-year U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of our stock options.
(2) We used an outside valuation advisor to assist us in projecting the expected stock price volatility. We considered both historical data
and observable market prices of similar equity instruments.
(3) We estimated the expected life of stock options based upon historical experience.
New Accounting Standards
In July 2006, the FASB issued FIN No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109. FIN No. 48 provides guidance
regarding the recognition, measurement, presentation and
disclosure in the financial statements of tax positions taken
or expected to be taken on a tax return, including the
decision whether to file or not to file in a particular
jurisdiction. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006. We will adopt FIN
No. 48 beginning in the first quarter of fiscal 2008. The
cumulative effect of applying the provisions of FIN No. 48
upon initial adoption will be reported as an adjustment to
retained earnings as of the beginning of fiscal 2008. We
are evaluating the impact, if any, the adoption of FIN
No. 48 will have on our operating income, net earnings or
retained earnings.
In May 2007, the FASB issued FSP FIN No. 48-1, Definition
of “Settlement” in FASB Interpretation No. 48.FSPFIN
No. 48-1 provides guidance on how a company should
determine whether a tax position is effectively settled for the
purpose of recognizing previously unrecognized tax
benefits. FSP FIN No. 48-1 is effective upon initial adoption
of FIN No. 48, which we will adopt in the first quarter of
fiscal 2008, as indicated above.
In September 2006, the U.S. Securities and Exchange
Commission (“SEC”) issued Staff Accounting Bulletin
(“SAB”) No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current
Year Financial Statements, which provides interpretive
guidance on the consideration of the effects of prior-year
misstatements in quantifying current-year misstatements for
the purpose of a materiality assessment. SAB No. 108 is
effective for fiscal years ending after November 15, 2006.