Big Lots 2013 Annual Report Download - page 181

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Insurance and Insurance-Related Reserves
We are self-insured for certain losses relating to property, general liability, workers' compensation, and employee medical and
dental benefit claims, a portion of which is funded by employees. We purchase stop-loss coverage from third party insurance
carriers to limit individual or aggregate loss exposure in these areas. Accrued insurance liabilities and related expenses are
based on actual claims reported and estimates of claims incurred but not reported. The estimated loss accruals for claims
incurred but not paid are determined by applying actuarially-based calculations taking into account historical claims payment
results and known trends such as claims frequency and claims severity. Management makes estimates, judgments, and
assumptions with respect to the use of these actuarially-based calculations, including but not limited to, estimated health care
cost trends, estimated lag time to report and pay claims, average cost per claim, network utilization rates, network discount
rates, and other factors. A 10% change in our self-insured liabilities at February 1, 2014 would have affected selling and
administrative expenses, operating profit, and income from continuing operations before income taxes by approximately $7
million.
General liability and workers' compensation liabilities are recorded at our estimate of their net present value, using a 4.0%
discount rate, while other liabilities for insurance reserves are not discounted. A 1.0% change in the discount rate on these
liabilities would have affected selling and administrative expenses, operating profit, and income from continuing operations
before income taxes by approximately $1.9 million.
Costs Associated with Exit or Disposal Activities
Our accruals for costs associated with exit or disposal activities arise from management's decision to wind down certain
operations and require significant judgment, the use of estimates, and the interpretation and application of complex accounting
principles. The accruals for costs associated with exit or disposal activities primarily consist of contract termination costs,
principally related to operating leases, and severance benefits. For our contract termination cost estimates, management utilizes
the advice and input of outside real estate specialists when determining its valuation of the liabilities. The accruals for contract
termination costs and severance benefits factor in many variables including, but not limited to, expected vacancy periods,
tenancy rates per square foot, buy-out scenarios, costs of capital, operating performance during the wind down period, and
forfeitures. A 10% change in our accrued liabilities for costs associated with exit disposal activities at February 1, 2014 would
have affected selling and administrative expenses, operating profit, and income from continuing operations before income taxes
by approximately $0.4 million.
Lease Accounting
In order to recognize rent expense on our leases, we evaluate many factors to identify the lease term such as the contractual
term of the lease, our assumed possession date of the property, renewal option periods, and the estimated value of leasehold
improvement investments that we are required to make. Based on this evaluation, our lease term is typically the minimum
contractually obligated period over which we have control of the property. This term is used because although many of our
leases have renewal options, we typically do not incur an economic or contractual penalty in the event of non-renewal.
Therefore, we typically use the initial minimum lease term for purposes of calculating straight-line rent, amortizing deferred
rent, and recognizing depreciation expense on our leasehold improvements.
Commitments
For a discussion on certain of our commitments, refer to note 3, note 5, note 10, note 13, and note 14 to the accompanying
consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk from exposure to changes in interest rates on investments and on borrowings under the 2011
Credit Agreement that we make from time to time. We had borrowings of $77.0 million under the 2011 Credit Agreement at
February 1, 2014. An increase of 1.0% in our variable interest rate on our investments and expected future borrowings would
not have a material effect on our financial condition, results of operations, or liquidity.
Through the operations of Big Lots Canada, we are subject to market risks associated with foreign currency exchange rate
fluctuations between the Canadian Dollar and the U.S. Dollar. An increase or decrease of 1% in foreign currency exchange
rates would not have a material effect on our financial condition, results of operations, or liquidity.