Walmart 2009 Annual Report Download - page 38

36 Wal-Mart 2009 Annual Report
Notes to Consolidated Financial Statements
and International segments’ distribution facilities in cost of sales, our
gross pro t and gross pro t as a percentage of net sales (our “gross
pro t margin”) may not be comparable to those of other retailers that
may include all costs related to their distribution facilities in cost of
sales and in the calculation of gross pro t.
Advertising Costs
Advertising costs are expensed as incurred and were $2.3 billion, $2.0 bil-
lion and $1.9 billion in  scal 2009, 2008 and 2007, respectively. Adver-
tising costs consist primarily of print and television advertisements.
Pre-Opening Costs
The costs of start-up activities, including organization costs, related
to new store openings, store remodels, expansions and relocations
are expensed as incurred.
Share-Based Compensation
The Company recognizes expense for its share-based compensation
based on the fair value of the awards that are granted. The fair value
of stock options is estimated at the date of grant using the Black-
Scholes-Merton option valuation model which was developed for
use in estimating the fair value of exchange traded options that have
no vesting restrictions and are fully transferable. Option valuation
methods require the input of highly subjective assumptions, includ-
ing the expected stock price volatility. Measured compensation cost,
net of estimated forfeitures, is recognized ratably over the vesting
period of the related share-based compensation award.
Share-based compensation awards that may be settled in cash
are accounted for as liabilities and marked to market each period.
Measured compensation cost for performance-based awards is
recognized only if it is probable that the performance condition
will be achieved.
Insurance/Self-Insurance
The Company uses a combination of insurance, self-insured retention
and self-insurance for a number of risks, including, without limitation,
workers’ compensation, general liability, vehicle liability, property and
the Company’s obligation for employee-related health care bene ts.
Liabilities associated with these risks are estimated by considering his-
torical claims experience, demographic factors, frequency and sever-
ity factors and other actuarial assumptions. In estimating our liability
for such claims, we periodically analyze our historical trends, including
loss development, and apply appropriate loss development factors
to the incurred costs associated with the claims. During the last few
years, we have enhanced how we manage our workers’ compensa-
tion and general liability claims. As a result, our loss experience with
respect to such claims has improved and the actuarially determined
ultimate loss estimates, primarily for claims from  scal 2004 through
2007, were reduced during the quarter ended July 31, 2007. The
reductions in ultimate loss estimates resulted primarily from improved
claims handling experience, which impacts loss development factors
and other actuarial assumptions. Due to the bene cial change in esti-
mate of our ultimate losses, accrued liabilities for general liability and
workers’ compensation claims were reduced by $196 million after tax,
resulting in an increase in net income per basic and diluted common
share of $0.05 for the second quarter of  scal year 2008.
Depreciation and Amortization
Depreciation and amortization for  nancial statement purposes are
provided on the straight-line method over the estimated useful lives
of the various assets. Depreciation expense, including amortization
of property under capital leases, for  scal years 2009, 2008 and 2007
was $6.7 billion, $6.3 billion and $5.5 billion, respectively. For income
tax purposes, accelerated methods of depreciation are used with
recognition of deferred income taxes for the resulting temporary
di erences. Leasehold improvements are depreciated over the shorter
of the estimated useful life of the asset or the remaining expected
lease term. Estimated useful lives for  nancial statement purposes
are as follows:
Buildings and improvements 5–50 years
Fixtures and equipment 3–20 years
Transportation equipment 4–15 years
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to di erences between the
 nancial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in e ect for the year in which those
temporary di erences are expected to be recovered or settled. The
e ect on deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts more likely than not to be realized.
The Company accounts for unrecognized tax bene ts in accordance
with Financial Accounting Standards Board (“FASB”) Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which
was adopted in  scal year 2008 and discussed further in Note 5.
Accrued Liabilities
Accrued liabilities consist of the following:
January 31,
(Amounts in millions) 2009 2008
Accrued wages and bene ts $ 5,577 $ 5,247
Self-insurance 3,108 2,907
Other 9,427 7,571
Total accrued liabilities $18,112 $15,725
Net Income Per Common Share
Basic net income per common share is based on the weighted-average
number of outstanding common shares. Diluted net income per
common share is based on the weighted-average number of out-
standing shares adjusted for the dilutive e ect of stock options and
other share-based awards. The dilutive e ect of stock options and
other share-based awards was 12 million, 6 million and 4 million shares
in  scal 2009, 2008 and 2007, respectively. The Company had approxi-
mately 6 million, 62 million and 62 million option shares outstanding
at January 31, 2009, 2008 and 2007, respectively, which were not
included in the diluted net income per share calculation because
their e ect would be antidilutive.