Lowe's 2015 Annual Report Download - page 38

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Self-Insurance
Description
We are self-insured for certain losses relating to workers’ compensation, automobile, general and product liability, extended
protection plan, and certain medical and dental claims. Our self-insured retention or deductible, as applicable, is limited to $2
million per occurrence involving workers’ compensation, $5 million per occurrence involving general or product liability, and
$10 million per occurrence involving automobile. We do not have any insurance coverage for self-insured extended protection
plan or 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 2015, our self-insurance liability decreased approximately $22 million to $883
million as of January 29, 2016.
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 $54 million for 2015. A 100 basis point change in our discount rate would have
affected net earnings by approximately $18 million for 2015.
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 decreased $1 million to $729 million as of
January 29, 2016.
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 2015,
deferred revenues associated with these transactions increased $74 million to $619 million as of January 29, 2016.
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