Lowe's 2014 Annual Report Download - page 39

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affected net earnings by approximately $55 million for 2014. A 100 basis point change in our discount rate would have
affected net earnings by approximately $19 million for 2014.
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 were $730 million as of January 30, 2015 and
January 31, 2014.
We defer revenue and cost of sales associated with settled 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 2014,
deferred revenues associated with these transactions increased $84 million to $545 million as of January 30, 2015.
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 2014 under these contracts would have affected net earnings by approximately $19 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 $9 million in 2014.
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