Summary of Significant Accounting Policies

Unless the context otherwise requires, the use of the terms "Best Buy," "we," "us" and "our" in these Notes to Consolidated Financial Statements refers to Best Buy Co., Inc. and, as applicable, its consolidated subsidiaries.

Description of Business

We are a leading provider of technology products, services and solutions. We offer these products and services to customers who visit our stores, engage with Geek Squad agents or use our websites or mobile applications. We have operations in the U.S., Canada and Mexico. We have two reportable segments: Domestic and International. The Domestic segment is comprised of the operations in all states, districts and territories of the U.S., under various brand names including Best Buy, bestbuy.com, Best Buy Mobile, Best Buy Direct, Best Buy Express, Geek Squad, Magnolia Home Theater and Pacific Kitchen and Home. The International segment is comprised of all operations in Canada and Mexico under the brand names Best Buy, Best Buy Express, Best Buy Mobile and Geek Squad and the domain names bestbuy.ca and bestbuy.com.mx.

Basis of Presentation

The consolidated financial statements include the accounts of Best Buy Co., Inc. and its consolidated subsidiaries. All intercompany balances and transactions are eliminated upon consolidation.

In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations on a one-month lag. Our policy is to accelerate recording the effect of events occurring in the lag period that significantly affect our consolidated financial statements. No significant intervening event occurred in these operations that would have materially affected our financial condition, results of operations, liquidity or other factors had it been recorded during fiscal 2018, 2017 or 2016.

Discontinued Operations

Discontinued operations are primarily comprised of Jiangsu Five Star Appliance Co., Limited ("Five Star") within our International segment. See Note 2, Discontinued Operations, for further information.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP") requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts in the consolidated financial statements, as well as the disclosure of contingent liabilities. Future results could be materially affected if actual results were to differ from these estimates and assumptions.

Fiscal Year

Our fiscal year ends on the Saturday nearest the end of January. Fiscal 2018 included 53 weeks, with the additional week occurring in the fourth quarter, and fiscal 2017 and 2016 each included 52 weeks.

Unadopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. The new guidance establishes a single comprehensive model for entities to use in accounting for revenue and supersedes most current revenue recognition guidance. It introduces a five-step process for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards under current guidance.

We will adopt this standard in the first quarter of fiscal 2019 using the modified retrospective method. Under this method, we will recognize the cumulative effect of the changes in retained earnings at the date of adoption, but will not restate prior periods. We currently estimate the pre-tax impact of these changes to increase retained earnings by approximately $75 million to $100 million. We expect the impact of adoption to be immaterial to net earnings on an ongoing basis.

Our adoption assessment included a detailed review of contracts for each revenue stream and a comparison of historical accounting policies to the new standard. Based on these procedures, we have determined the impact will be (1) minor changes to the timing of recognition of revenues related to our gift cards and loyalty programs and certain third-party software licenses where we are the agent, and (2) presentation changes to certain immaterial revenues that are currently reported on a gross or net basis. In addition, the balance sheet presentation of our sales return reserve will change to present a separate return asset and liability, instead of net presentation used currently.

As part of our adoption, we have modified our control procedures and processes, including reporting logic from impacted systems, although we do not expect these updates to have a material effect on our internal controls over financial reporting.

Additionally, the adoption of ASU 2014-09 will result in increased footnote disclosures, particularly with regard to (1) revenue-related balance sheet accounts and associated activity in the fiscal period, (2) disaggregation of revenue by channel and product category, (3) unsatisfied performance obligations for our service contracts with a duration of over one year, (4) the pro-forma impact of changes to our financial statements in the initial year of adoption, and (5) qualitative disclosures related to the nature and terms of our sales, timing of the transfer of control and judgments used in our application of the five-step process.

In February 2016, the FASB issued ASU 2016-02, Leases, and has since issued additional ASUs to further clarify or add options to the issued guidance. The new guidance was issued to increase transparency and comparability among companies by requiring most leases to be included on the balance sheet and by expanding disclosure requirements. Based on the effective dates, we expect to adopt the new guidance in the first quarter of fiscal 2020 using the recently-proposed prospective method and have begun implementing required upgrades to our existing lease systems. While we expect adoption to lead to a material increase in the assets and liabilities recorded on our balance sheet and an increase to our footnote disclosures related to leases, we are still evaluating the impact on our consolidated statement of earnings. We also expect that adoption of the new standard will require changes to our internal controls over financial reporting.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. We will adopt ASU 2016-16 in the first quarter of fiscal 2019. Based on our preliminary assessment, we believe the impact of adopting the new guidance will be immaterial to our annual and interim financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging. The new guidance amends the hedge accounting recognition and presentation requirements. Based on the effective dates, we will prospectively adopt this standard in the first quarter of fiscal 2019. We believe the impact will be immaterial to our annual and interim financial statements.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance allows the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The guidance is effective for our fiscal 2020, with early adoption permitted. We plan to early adopt ASU 2018-02 in the first quarter of fiscal 2019. Based on our preliminary assessment, we believe the impact will be immaterial to our annual and interim financial statements.

Adopted Accounting Pronouncements

In the first quarter of fiscal 2018, we adopted the following ASUs:


•	ASU 2015-11, Inventory: Simplifying the Measurement of Inventory. The adoption did not have a material impact on our results of operations, cash flows or financial position.

•

ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. Excess tax benefits and tax deficiencies are now recognized in our provision for income taxes as a discrete event rather than as a component of shareholders’ equity. In addition, we elected to account for forfeitures as they occur. The cumulative effect of this policy change amounted to $12 million, net of tax, and was recorded as a reduction to our retained earnings opening balance. Finally, we elected to present the Consolidated Statements of Cash Flows on a retrospective transition method and prior periods have been adjusted to present excess tax benefits as cash flows from operating activities.

•

ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, and ASU 2016-18, Statement of Cash Flows: Restricted Cash. The retrospective adoption increased our beginning and ending cash balances within our statement of cash flows. The adoption had no other material impacts to our cash flow statement and had no impact on our results of operations or financial position.

The following table reconciles the Consolidated Statement of Cash Flows line items impacted by the adoption of these standards at January 28, 2017, and January 30, 2016:



	January 28, 2017 Reported			ASU 2016-09 Adjustment			ASU 2016-15 Adjustment			ASU 2016-18 Adjustment		January 28, 2017 Adjusted
Operating activities
Other, net	$	(31	)	$	14		$	—		$	—	$	(17	)
Changes in operating assets and liabilities:
Receivables	(185		)	—			(8		)	—		(193		)
Merchandise inventories	193			—			6			—		199
Total cash provided by (used in) operating activities	2,545			14			(2		)	—		2,557
Investing activities
Additions to property and equipment, net	(582		)	—			2			—		(580		)
Change in restricted assets	(8		)	—			—			8		—
Total cash provided by (used in) investing activities	(887		)	—			2			8		(877		)
Financing activities
Other, net	22			(14		)	—			—		8
Total cash used in financing activities	(1,404		)	(14		)	—			—		(1,418		)
Increase in cash, cash equivalents and restricted cash	264			—			—			8		272
Cash, cash equivalents and restricted cash at beginning of period	1,976			—			—			185		2,161
Cash, cash equivalents and restricted cash at end of period	$	2,240		$	—		$	—		$	193	$	2,433



	January 30, 2016 Reported			ASU 2016-09 Adjustment			ASU 2016-15 Adjustment		ASU 2016-18 Adjustment			January 30, 2016 Adjusted
Operating activities
Other, net	$	38		$	21		$	—	$	—		$	59
Total cash provided by operating activities	1,322			21			—		—			1,343
Investing activities
Proceeds from sale of business, net of cash transferred	103			—			—		(154		)	(51		)
Change in restricted assets	(47		)	—			—		47			—
Total cash used in investing activities	(419		)	—			—		(107		)	(526		)
Financing activities
Other, net	20			(21		)	—		—			(1		)
Total cash used in financing activities	(1,515		)	(21		)	—		—			(1,536		)
Decrease in cash, cash equivalents and restricted cash	(650		)	—			—		(107		)	(757		)
Cash, cash equivalents and restricted cash at beginning of period, excluding held for sale	2,432			—			—		184			2,616
Cash, cash equivalents and restricted cash at beginning of period, held for sale	194			—			—		108			302
Cash, cash equivalents and restricted cash at end of period	$	1,976		$	—		$	—	$	185		$	2,161

Total Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of Cash, cash equivalents and restricted cash reported within our Consolidated Balance Sheets to the total shown in our Consolidated Statements of Cash Flows:



	January 28, 2017		January 30, 2016
Cash and cash equivalents	$	2,240	$	1,976
Restricted cash included in Other current assets	193		185
Total cash, cash equivalents and restricted cash	$	2,433	$	2,161

Amounts included in restricted cash are pledged as collateral or restricted to use for general liability insurance and workers' compensation insurance.

Cash and Cash Equivalents

Cash primarily consists of cash on hand and bank deposits. Cash equivalents consist of money market funds, commercial paper, corporate bonds and time deposits with an original maturity of 3 months or less when purchased. The amounts of cash equivalents at February 3, 2018, and January 28, 2017, were $524 million and $1,531 million, respectively, and the weighted-average interest rates were 1.1% and 0.5%, respectively.

Receivables

Receivables consist principally of amounts due from mobile phone network operators for device sales and commissions, banks for customer credit card and debit card transactions and vendors for various vendor funding programs.

We establish allowances for uncollectible receivables based on historical collection trends and write-off history. Our allowances for uncollectible receivables were $37 million and $52 million at February 3, 2018, and January 28, 2017, respectively.

Merchandise Inventories

Merchandise inventories are recorded at the lower of cost or net realizable value and the weighted average method is used to determine the cost of inventory. In-bound freight-related costs from our vendors are included as part of the net cost of merchandise inventories. Also included in the cost of inventory are certain vendor allowances that are not a reimbursement of specific, incremental and identifiable costs to promote a vendor's products. Other costs associated with acquiring, storing and transporting merchandise inventories to our retail stores are expensed as incurred and included in cost of goods sold.

Our inventory valuation reflects adjustments for anticipated physical inventory losses (e.g., theft) that have occurred since the last physical inventory. Physical inventory counts are taken on a regular basis to ensure that the inventory reported in our consolidated financial statements is properly stated.

Our inventory valuation also reflects markdown adjustments for the excess of the cost over the net recovery we expect to realize from the ultimate sale or other disposal of inventory and establish a new cost basis. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded markdown adjustments or an increase in the newly established cost basis.

Restricted Assets

Restricted cash totaled $199 million and $193 million at February 3, 2018, and January 28, 2017, respectively, and is included in Other current assets on our Consolidated Balance Sheets. Such balances are pledged as collateral or restricted to use for general liability insurance and workers' compensation insurance.

Property and Equipment

Property and equipment are recorded at cost. We compute depreciation using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the period from the date the assets are placed in service to the end of the lease term, which includes optional renewal periods if they are reasonably assured. Accelerated depreciation methods are generally used for income tax purposes.

When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from our Consolidated Balance Sheets and any resulting gain or loss is reflected on our Consolidated Statements of Earnings.

Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated.

Costs associated with the acquisition or development of software for internal use are capitalized and amortized over the expected useful life of the software, generally from two to seven years. A subsequent addition, modification or upgrade to internal-use software is capitalized to the extent that it enhances the software's functionality or extends its useful life. Capitalized software is included in fixtures and equipment. Software maintenance and training costs are expensed in the period incurred.

Property under capital and financing leases is comprised of buildings and equipment used in our operations. These assets are typically depreciated over the shorter of the useful life of the asset or the term of the lease. The carrying value of property under capital and financing leases was $184 million and $166 million at February 3, 2018, and January 28, 2017, respectively, net of accumulated depreciation of $156 million and $134 million, respectively.

Estimated useful lives by major asset category are as follows:



Asset	Life (in years)
Buildings	5-35
Leasehold improvements	3-15
Fixtures and equipment	2-15
Property under capital and financing leases	3-5

Impairment of Long-Lived Assets and Costs Associated With Exit Activities

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Factors considered important that could result in an impairment review include, but are not limited to, negative operating income for the most recent 12-month period, significant under-performance relative to historical or planned operating results, significant changes in the manner of use or expected life of the assets or significant changes in our business strategies. An impairment loss is recognized when the estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from the disposition of the asset, if any, are less than the carrying value of the asset net of other liabilities. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value using valuation techniques, such as discounted cash flow analysis.

When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For example, long-lived assets deployed at store locations are reviewed for impairment at the individual store level, which involves comparing the carrying value of all land, buildings, leasehold improvements, fixtures and equipment located at each store to the net cash flow projections for each store. In addition, we conduct separate impairment reviews at other levels as appropriate, for example, to evaluate potential impairment of assets shared by several areas of operations, such as information technology systems. Refer to Note 3, Fair Value Measurements, for further information associated with the long-lived asset impairments, including valuation techniques used, impairment charges incurred and remaining carrying values.

The present value of costs associated with vacated properties, primarily future lease costs net of expected sublease income, are charged to earnings when we cease using the property. We accelerate depreciation on property and equipment we expect to retire when a decision is made to abandon a property.

At February 3, 2018, and January 28, 2017, the obligation associated with vacant properties included in Accrued liabilities on our Consolidated Balance Sheets was $17 million and $29 million, respectively, and the obligation associated with vacant properties included in Long-term liabilities on our Consolidated Balance Sheets was $21 million and $37 million, respectively. The obligation associated with vacant properties at February 3, 2018, and January 28, 2017, included amounts associated with our restructuring activities as further described in Note 4, Restructuring Charges.

Leases

We conduct the majority of our retail and distribution operations from leased locations. The leases generally require payment of real estate taxes, insurance and common area maintenance, in addition to rent. The terms of our new lease agreements for large-format stores are generally less than 10 years, although we have existing leases with terms up to 20 years. Small-format stores generally have lease terms that are less than 3 years. Most of the leases contain renewal options and escalation clauses, and certain store leases require contingent rents based on factors such as specified percentages of revenue or the consumer price index.

For leases that contain predetermined fixed escalations of the minimum rent, we recognize the related rent expense on a straight-line basis from the date we take possession of the property to the end of the initial lease term. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.

Cash or lease incentives received upon entering into certain store leases ("tenant allowances") are recognized on a straight-line basis as a reduction to rent from the date we take possession of the property through the end of the initial lease term. We record the unamortized portion of tenant allowances as a part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.

At February 3, 2018, and January 28, 2017, deferred rent included in Accrued liabilities on our Consolidated Balance Sheets was $30 million and $33 million, respectively, and deferred rent included in Long-term liabilities on our Consolidated Balance Sheets was $107 million and $121 million, respectively.

In addition, we have financing leases for agreements when we are deemed the owner of the leased buildings, typically due to significant involvement during the construction period, and do not qualify for sales recognition under the sale-leaseback accounting guidance. We record the cost of the building in property and equipment, with the related short-term liability recorded in current portion of long-term debt and the long-term liability recorded in long-Term Debt. At February 3, 2018, and January 28, 2017, we had $191 million and $177 million, respectively, outstanding under financing lease obligations. Refer to Note 8, Leases, for maturity details.

Assets acquired under capital and financing leases are depreciated over the shorter of the useful life of the asset or the lease term, including renewal periods, if reasonably assured.

Goodwill and Intangible Assets

Goodwill

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. We test goodwill for impairment annually, as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist. We monitor the existence of potential impairment indicators throughout the fiscal year. We test for goodwill impairment at the reporting unit level and our reporting units are the components of operating segments which constitute businesses for which discrete financial information is available and is regularly reviewed by segment management. No components were aggregated in arriving at our reporting units. Our only reporting unit with a goodwill balance at the beginning of fiscal 2018 was our Domestic segment.

Our detailed impairment testing involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit and is based on discounted cash flows or relative market-based approaches. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. In fiscal 2018, we determined that the fair value of the Domestic reporting unit exceeded its carrying value, and as a result, no goodwill impairment was recorded. No goodwill impairment was recorded in fiscal 2017 or 2016.

Tradenames

We have an indefinite-lived tradename related to Pacific Sales included within our Domestic segment, which is recorded within Other assets on our Consolidated Balance Sheets. As of the end of fiscal 2018, we have no indefinite-lived tradenames within our International segment.

Our valuation of identifiable intangible assets acquired is based on information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value. We do not amortize our indefinite-lived tradenames, but test for impairment annually, or when indications of potential impairment exist. We utilize the relief from royalty method to determine the fair value of our indefinite-lived tradename. If the carrying value exceeds the fair value, we recognize an impairment loss in an amount equal to the excess. In fiscal 2018, we determined that the fair value of the tradenames exceeded their carrying value, and as a result, no impairment was recorded. No impairments were recorded in fiscal 2017. In fiscal 2016, we recorded a $39 million impairment related to our indefinite-lived Future Shop tradename as part of the Canadian brand consolidation. Refer to Note 4, Restructuring Charges, for additional information. No other impairments were identified in fiscal 2016.

As of February 3, 2018, January 28, 2017, and January 30, 2016, the carrying amount of goodwill and indefinite-lived tradenames was $425 million and $18 million, respectively.

The following table provides the gross carrying amount of goodwill and cumulative goodwill impairment losses ($ in millions):



	February 3, 2018					January 28, 2017
	Gross Carrying Amount		Cumulative Impairment			Gross Carrying Amount		Cumulative Impairment
Goodwill	$	1,100	$	(675	)	$	1,100	$	(675	)

Insurance

We are self-insured for certain losses related to health, workers' compensation and general liability claims; however, we obtain third-party insurance coverage to limit our exposure to certain claims. Some of these self-insured losses are managed through a wholly-owned insurance captive. We estimate our self-insured liabilities using a number of factors, including historical claims experience, an estimate of incurred but not reported claims, demographic and severity factors and valuations provided by independent third-party actuaries. Our self-insured liabilities included in our Consolidated Balance Sheets were as follows ($ in millions):



	February 3, 2018		January 28, 2017
Accrued liabilities	$	67	$	65
Long-term liabilities	64		63
Total	$	131	$	128

Income Taxes

We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. We record a valuation allowance to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.

In determining our provision for income taxes, we use an annual effective income tax rate based on annual income, permanent differences between book and tax income and statutory income tax rates. The effective income tax rate also reflects our assessment of the ultimate outcome of tax audits. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available. Discrete events, such as audit settlements or changes in tax laws, are recognized in the period in which they occur.

Our income tax returns are periodically audited by U.S. federal, state and local and foreign tax authorities. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with our various tax filing positions, we may record a liability for such exposures. A number of years may elapse before a particular matter, for which we have established a liability, is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax provisions in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. We include our liability for unrecognized tax benefits, including accrued penalties and interest, in Accrued income taxes and Long-term liabilities on our Consolidated Balance Sheets and in Income tax expense on our Consolidated Statements of Earnings.

Accrued Liabilities

The major components of accrued liabilities at February 3, 2018, and January 28, 2017, were state and local tax liabilities, advertising accruals, loyalty program liabilities, rent-related liabilities and self-insurance reserves.

Long-Term Liabilities

The major components of long-term liabilities at February 3, 2018, and January 28, 2017, were unrecognized tax benefits, income tax liabilities, rent-related liabilities, self-insurance reserves, deferred compensation plan liabilities and deferred revenue from service contracts.

Foreign Currency

Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at our Consolidated Balance Sheet date. For operations reported on a one-month lag, we use the exchange rates in effect one month prior to our Consolidated Balance Sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on the translation of assets and liabilities is included as a component of shareholders' equity in accumulated other comprehensive income. Gains and losses from foreign currency transactions, which are included in SG&A, have not been significant in any of the periods presented.

Revenue Recognition

We recognize revenue when the sales price is fixed or determinable, collection is reasonably assured and the customer takes possession of the merchandise, or in the case of services, the service has been provided. Revenue excludes sales taxes collected. Revenue from merchandise sales and services is reported net of sales returns, which includes an estimate of future returns based on historical return rates, with a corresponding reduction to cost of sales. Our sales returns reserve, which represents the estimated gross margin impact of returns, was $23 million and $28 million at February 3, 2018, and January 28, 2017, respectively.

For revenue transactions that involve multiple deliverables, we defer the revenue associated with any undelivered elements. The amount of revenue deferred in connection with the undelivered elements is determined using the relative fair value of each element.

Our deferred revenues primarily relate to merchandise not yet delivered to customers, services not yet completed and technical support contracts not yet completed. Short-term deferred revenue was $453 million and $418 million as of February 3, 2018, and January 28, 2017, respectively. At February 3, 2018, and January 28, 2017, deferred revenue included within long-term liabilities was $22 million and $34 million, respectively.

Merchandise revenue

Revenue is recognized for store sales when the customer receives and pays for merchandise. In the case of items paid for in store but subsequently delivered to the customer, revenue is recognized once delivery has been completed.

For transactions initiated online, customers choose whether to collect merchandise from one of our stores (“in-store pick up”) or have it delivered to them (typically using third-party parcel delivery companies). For in-store pick up, we recognize revenue once the customer has taken possession of merchandise. For items delivered directly to the customer, we recognize revenue when delivery has been completed. Any fees charged to customers for delivery are also recognized when delivery has been completed.

Services

Revenue related to consultation, design, installation, set-up, repair and educational classes are recognized once the service is complete. We sell various protection plans with extended warranty coverage for merchandise and technical support to assist customers in using their devices. Such plans have terms typically ranging from one month to five years. For extended warranty protection, third-party underwriters assume the risk associated with the coverage and are deemed to be the legal obligor. We record the net commissions we receive (the amount charged to the customer less the premiums remitted to the underwriter) as revenue when the corresponding merchandise revenue is recognized. In addition, we are eligible to receive profit-sharing payments, which are dependent upon the performance of the portfolio. We record such profit-share as revenue once the portfolio period to which it relates is complete and we have sufficient evidence to estimate the amount. Service and commission revenues earned from the sale of extended warranties represented 2.0%, 2.2% and 2.3% of revenue in fiscal 2018, 2017 and 2016, respectively. These percentages include $68 million, $133 million and $158 million in fiscal 2018, 2017 and 2016, respectively, of profit-share revenue.

For technical support contracts, we assume responsibility for fulfilling the support to customers and we recognize the associated revenue either on a straight-line basis over the life of the contracts, or if sufficient history is available, on a usage basis.

Credit card revenue

We offer promotional financing and credit cards issued by third-party banks that manage and directly extend credit to our customers. The banks are the sole owners of the accounts receivable generated under the program and accordingly, we do not hold any consumer receivables related to these programs. We are eligible to receive a profit-share from our banking partners based on the performance of the programs. We record such profit-share as revenue once the portfolio period to which it relates is complete, and we have sufficient evidence to estimate the amount.

Gift cards

We sell gift cards to our customers in our retail stores, online and through select third parties. We do not charge administrative fees on unused gift cards and our gift cards do not have an expiration date. We recognize revenue from gift cards when the card is redeemed by the customer. For unredeemed gift cards, we recognize breakage when the likelihood of the gift card being redeemed by the customer is deemed remote, and we determine that we do not have a legal obligation to remit the value of the unredeemed gift cards to a relevant jurisdiction ("gift card breakage"). We determine the breakage rate based on historical redemption patterns and record projected breakage 24 months after the gift card is issued. Gift card breakage income is included in revenue. Gift card breakage income was $40 million, $37 million and $46 million in fiscal 2018, 2017 and 2016, respectively.

Sales Incentives

We frequently offer sales incentives that entitle our customers to receive a gift card at the time of purchase or a reduction in the price of a product or service either at the point of sale or by submitting a claim for a refund (for example, coupons, rebates, etc.). For sales incentives issued to the customer in conjunction with a sale of merchandise or services, the reduction in revenue is recognized at the time of sale, based on the expected retail value of the incentive expected to be redeemed.

Customer Loyalty Programs

We have customer loyalty programs which allow members to earn points for each purchase completed with us or when using our co-branded credit cards. Points earned enable members to receive a certificate that may be redeemed on future purchases at our Best Buy branded stores. Depending on the customer's membership level within our loyalty program, certificate expirations typically range from 2 to 12 months from the date of issuance. The value of points earned by our loyalty program members is included in accrued liabilities and recorded as a reduction of revenue at the time the points are earned, based on the value of points that are projected to be redeemed.

We recognize revenue when: (1) a certificate is redeemed by the customer; (2) a certificate expires; or (3) the likelihood of a certificate being redeemed by a customer is low ("certificate breakage"). We determine our certificate breakage rate based upon historical redemption patterns.

Cost of Goods Sold and Selling, General and Administrative Expenses

The following table illustrates the primary costs classified in each major expense category:



Cost of Goods Sold
•	Cost of products sold, including:
	—	Freight expenses associated with moving merchandise inventories from our vendors to our distribution centers;
	—	Vendor allowances that are not a reimbursement of specific, incremental and identifiable costs; and
	—	Cash discounts on payments to merchandise vendors;
•	Cost of services provided, including:
	—	Payroll and benefit costs for services employees; and
	—	Cost of replacement parts and related freight expenses;
•	Physical inventory losses;
•	Markdowns;
•	Customer shipping and handling expenses;
•	Costs associated with operating our distribution network, including payroll and benefit costs, occupancy costs and depreciation; and
•	Freight expenses associated with moving merchandise inventories from our distribution centers to our retail stores.



SG&A
•		Payroll and benefit costs for retail and corporate employees;
•		Occupancy and maintenance costs of retail, services and corporate facilities;
•		Depreciation and amortization related to retail, services and corporate assets;
•		Advertising costs;
•		Vendor allowances that are a reimbursement of specific, incremental and identifiable costs;
•		Tender costs, including bank charges and costs associated with credit and debit card interchange fees;
•		Charitable contributions;
•		Outside and outsourced service fees;
•		Long-lived asset impairment charges; and
•		Other administrative costs, such as supplies, travel and lodging.

Vendor Allowances

We receive allowances from certain vendors through a variety of programs and arrangements intended to offset our costs of promoting and selling merchandise inventories. Vendor allowances are primarily in the form of receipt-based funds or sell-through credits. Receipt-based funds are generally determined at an agreed percentage of the purchase price and are initially deferred and recorded as a reduction of merchandise inventories. The deferred amounts are then included as a reduction of cost of goods sold when the related product is sold. Sell-through credits are generally calculated using an agreed upon amount for each unit sold and are recognized when the related product is sold. Vendor allowances provided as a reimbursement of specific, incremental and identifiable costs, such as specialized store labor or training costs, are included in SG&A as an expense reduction when the cost is incurred.

Advertising Costs

Advertising costs, which are included in SG&A, are expensed when the advertisement is customer-facing. Advertising costs consist primarily of digital, print and television advertisements, as well as promotional events. Advertising expenses were $776 million, $743 million and $742 million in fiscal 2018, 2017 and 2016, respectively.

Stock-Based Compensation

We apply the fair value recognition provisions of accounting guidance as they relate to our stock-based compensation, which requires us to recognize expense for the fair value of our stock-based compensation awards. Compensation expense is recognized over the period in which services are required. It is recognized on a straight-line basis, except where there are performance awards that vest on a graded basis in which case the expense for these awards is front-loaded, or recognized on a graded attribution basis.