Lowe's 2010 Annual Report Download - page 29

LOWE’S 2010 ANNUAL REPORT 25
plan; and certain medical and dental claims. Self-insurance claims filed and
claims incurred but not reported are accrued based upon our estimates
of the discounted ultimate cost for self-insured claims incurred using
actuarial assumptions followed in the insurance industry and historical
experience.฀During฀2010,฀our฀self-insurance฀liability฀increased฀approxi-
mately฀$43฀million฀to฀$835฀million฀as฀of฀January฀28,฀2011.฀
Judgments and uncertainties involved in the estimate
These estimates are subject to changes in the regulatory environment;
utilized฀discount฀rate;฀projected฀exposures฀including฀payroll,฀sales฀and฀
vehicle units; as well as the frequency, lag and severity of claims.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to
establish our self-insurance liability during the past three fiscal years.
Although we believe that we have the ability to reasonably estimate
losses related to claims, it is possible that actual results could differ
from recorded self-insurance liabilities. A 10% change in our self-
insurance฀liability฀would฀have฀affected฀net฀earnings฀by฀approximately฀
$52฀million฀for฀2010.฀A฀100฀basis฀point฀change฀in฀our฀discount฀rate฀
would฀have฀affected฀net฀earnings฀by฀approximately฀$17฀million฀for฀2010.
Revenue Recognition
Description
See Note 1 to the consolidated financial statements for a discussion
of our revenue recognition policies. The following accounting estimates
relating to revenue recognition require management to make assumptions
and apply judgment regarding the effects of future events that cannot
be determined with certainty.
฀ We฀sell฀separately-priced฀extended฀protection฀plan฀contracts฀under฀
a Lowe’s-branded program for which the Company is ultimately self-
insured.฀The฀Company฀recognizes฀revenues฀from฀extended฀protection฀
plan sales on a straight-line basis over the respective contract term.
Extended฀protection฀plan฀contract฀terms฀primarily฀range฀from฀one฀to฀
four years from the date of purchase or the end of the manufacturer’s
warranty, as applicable. The Company consistently groups and evaluates
extended฀protection฀plan฀contracts฀based฀on฀the฀characteristics฀of฀the฀
underlying products and the coverage provided in order to monitor for
expected฀losses.฀A฀loss฀on฀the฀overall฀contract฀would฀be฀recognized฀
if฀the฀expected฀costs฀of฀performing฀services฀under฀the฀contracts฀
exceeded฀the฀amount฀of฀unamortized฀acquisition฀costs฀and฀related฀
deferred revenue associated with the contracts. Deferred revenues
associated฀with฀the฀extended฀protection฀plan฀contracts฀increased฀
$82฀million฀to฀$631฀million฀as฀of฀January฀28,฀2011.฀฀
We defer revenue and cost of sales associated with transactions
for which customers have not yet taken possession of merchandise or
for which installation has not yet been completed. Revenue is deferred
based on the actual amounts received. We use historical gross margin
rates to estimate the adjustment to cost of sales for these transactions.
During 2010, deferred revenues associated with these transactions
increased฀$17฀million฀to฀$371฀million฀as฀of฀January฀28,฀2011.
Judgments and uncertainties involved in the estimate
For฀extended฀protection฀plans,฀there฀is฀judgment฀inherent฀in฀our฀evaluation฀
of฀expected฀losses฀as฀a฀result฀of฀our฀methodology฀for฀grouping฀and฀
evaluating฀extended฀protection฀plan฀contracts฀and฀from฀the฀actuarial฀
determination of the estimated cost of the contracts. There is also
judgment inherent in our determination of the recognition pattern of
costs of performing services under these contracts.
For the deferral of revenue and cost of sales associated with
transactions for which customers have not yet taken possession of
merchandise or for which installation has not yet been completed,
there is judgment inherent in our estimates of gross margin rates.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to
recognize฀revenue฀on฀our฀extended฀protection฀plan฀contracts฀during฀
the past three fiscal years. We currently do not anticipate incurring
any฀overall฀contract฀losses฀on฀our฀extended฀protection฀plan฀contracts.฀
Although we believe that we have the ability to adequately monitor
and฀estimate฀expected฀losses฀under฀the฀extended฀protection฀plan฀
contracts, it is possible that actual results could differ from our estimates.
In addition, if future evidence indicates that the costs of performing
services under these contracts are incurred on other than a straight-
line basis, the timing of revenue recognition under these contracts
could change. A 10% change in the amount of revenue recognized
in 2010 under these contracts would have affected net earnings by
approximately฀$11฀million.
We have not made any material changes in the methodology
used to reverse net sales and cost of sales related to amounts
received for which customers have not yet taken possession of
merchandise or for which installation has not yet been completed.
We believe we have sufficient current and historical knowledge to
record reasonable estimates related to the impact to cost of sales
for these transactions. However, if actual results are not consistent
with our estimates or assumptions, we may incur additional income
or฀expense.฀A฀10%฀change฀in฀the฀estimate฀of฀the฀gross฀margin฀rates฀
applied to these transactions would have affected net earnings by
approximately฀$6฀million฀in฀2010.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
In฀addition฀to฀the฀risks฀inherent฀in฀our฀operations,฀we฀are฀exposed฀to฀
certain market risks, including changes in interest rates, commodity
prices฀and฀foreign฀currency฀exchange฀rates.
Interest Rate Risk
Fluctuations in interest rates do not have a material impact on our
financial condition and results of operations because our long-term
debt฀is฀carried฀at฀amortized฀cost฀and฀primarily฀consists฀of฀xed-rate฀
instruments. Therefore, providing quantitative information about
interest rate risk is not meaningful for financial instruments.
Commodity Price Risk
We purchase certain commodity products that are subject to price
volatility caused by factors beyond our control. We believe that the
price volatility of these products is mitigated by our selling prices and
through฀xed-price฀supply฀agreements฀with฀vendors.฀The฀selling฀prices฀
of฀these฀commodity฀products฀are฀inuenced,฀in฀part,฀by฀the฀market฀
price we pay, which is determined by industry supply and demand.
Foreign Currency Exchange Rate Risk
Although฀we฀have฀international฀operating฀entities,฀our฀exposure฀to฀
foreign฀currency฀exchange฀rate฀uctuations฀is฀not฀material฀to฀our฀
financial condition and results of operations.