Summary of Significant Accounting Policies Summary of Significant Accounting Policies (Policies)

12 Months Ended

Feb. 02, 2019

We strive to enrich the lives of consumers through technology, whether they connect with us online, visit our stores or invite us into their homes. We do this by solving technology problems and addressing key human needs across a range of areas, including entertainment, productivity, communication, food preparation, security and health and wellness. 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 Direct, Best Buy Express, Best Buy Mobile, Geek Squad, GreatCall, Magnolia 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, Geek Squad and the domain names bestbuy.ca and bestbuy.com.mx.

On October 1, 2018, we acquired all of the outstanding shares of GreatCall, Inc. ("GreatCall"). Refer to Note 2, Acquisition, for additional information.

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 2019, fiscal 2018 or fiscal 2017.

Discontinued Operations

Discontinued operations are primarily comprised of activity related to Jiangsu Five Star Appliance Co., Limited ("Five Star") within our International segment. Refer to Note 3, 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 2019 and fiscal 2017 included 52 weeks and fiscal 2018 included 53 weeks, with the additional week occurring in the fourth quarter.

New Accounting Pronouncements

Unadopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases, which will require the recognition of right-of-use ("ROU") assets and lease liabilities on the balance sheet for operating leases. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

We will be adopting the “Comparatives Under 840 Option” approach to transition. Under this method, financial information related to periods prior to adoption will be as originally reported under the current standard - Accounting Standards Codification ("ASC") 840, Leases. The effects of adopting the new standard (ASC 842, Leases) in fiscal 2020 will be recognized as a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal first quarter. We will elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification as operating or capital leases.

The most significant impact of adoption will be the recognition of ROU assets and lease liabilities in the range of approximately $2.6 billion to $3.0 billion for operating leases, while our accounting for existing capital leases remains substantially unchanged. We currently estimate the cumulative pre-tax impact of these changes will decrease retained earnings by approximately $20 million to $30 million in fiscal 2020. We do not believe the standard will materially affect our consolidated statements of earnings or cash flows. As part of our adoption, we have also modified our control procedures and processes.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). We do not believe the new guidance, which is effective for fiscal years beginning after December 15, 2019, will impact our consolidated financial statements, but are still evaluating the impact it will have on future annual or interim goodwill impairment tests performed.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements for fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of adopting the updated provisions.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance requires companies to apply the internal-use software guidance in ASC 350-40 to implementation costs incurred in a hosting arrangement that is a service contract to determine whether to capitalize certain implementation costs or expense them as incurred. We are currently evaluating the impact of adopting the updated provisions, which is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

Adopted Accounting Pronouncements

In the first quarter of fiscal 2019, we prospectively adopted the following ASUs, all of which had an immaterial impact on our results of operations, cash flows and financial position.


•	ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory


•	ASU 2017-12, Derivatives and Hedging


•	ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In the first quarter of fiscal 2019, we also adopted 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 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 previous guidance. We elected the modified retrospective method of adoption, which we applied to contracts not completed at the date of adoption. Under this method, we recorded an increase to opening retained earnings of $73 million, net of tax, due to the cumulative impact of these changes, which were primarily related to the timing of revenue recognition related to our gift cards, the sale of certain software licenses and our loyalty programs. We did not make any adjustments to prior period financial statements. The adoption did not have a material impact on our fiscal 2019 consolidated statements of earnings. As part of the adoption, we also modified certain control procedures and processes, none of which had a material effect on our internal controls over financial reporting.

The cumulative effect of the changes made to our Condensed Consolidated Balance Sheets on February 4, 2018, for the adoption of this standard was as follows ($ in millions):



	February 3, 2018 As Reported		ASU 2014-09 Adjustment on February 4, 2018			February 4, 2018 Adjusted
Assets
Other assets	$	374	$	(19	)	$	355
Liabilities
Unredeemed gift card liabilities	385		(69		)	316
Deferred revenue	453		(26		)	427
Accrued liabilities	1,001		3			1,004
Equity
Retained earnings	3,270		73			3,343

The following tables reflect the impact of adopting this standard on our Consolidated Balance Sheets as of February 2, 2019, and our Consolidated Statements of Earnings for the fiscal year ended February 2, 2019 ($ in millions, except per share amounts):



	February 2, 2019
Impact of Changes to Consolidated Balance Sheets	As Reported		Balances without Adoption of ASU 2014-09		Effect of Change Higher/(Lower)⁽¹⁾
Assets
Other current assets	$	466	$	410	$	56
Other assets	606		625		(19		)
Liabilities
Unredeemed gift card liabilities	290		352		(62		)
Deferred revenue	446		470		(24		)
Accrued liabilities	982		923		59
Equity
Retained earnings	2,985		2,921		64


(1)	Effect of change includes the opening retained earnings adjustment as detailed within the table above.



	Fiscal Year Ended February 2, 2019
Impact of Changes to Consolidated Statements of Earnings	As Reported		Balances without Adoption of ASU 2014-09		Effect of Change Higher/(Lower)
Revenue	$	42,879	$	42,830	$	49
Cost of goods sold	32,918		32,860		58
Gross profit	9,961		9,970		(9		)
Operating income	1,900		1,909		(9		)
Income tax expense	424		426		(2		)
Net earnings	1,464		1,471		(7		)

Basic earnings per share	$	5.30	$	5.32	$	(0.02	)
Diluted earnings per share	$	5.20	$	5.23	$	(0.03	)

SEC Disclosure Update

In the third quarter of fiscal 2019, the U.S. Securities and Exchange Commission ("SEC") adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded. While the amendment expanded the disclosure requirements for interim financial statements to include both current and comparative quarter- and year-to-date reconciliations of changes in shareholders' equity, it did not have a material impact on our interim or annual disclosures or financial statements.

Business Combinations

We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets and assumed liabilities at their acquisition date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Results of operations related to business combinations are included prospectively beginning with the date of acquisition and transaction costs related to business combinations are recorded within selling, general and administrative ("SG&A") expenses. Refer to Note 2, Acquisition, for further information regarding our acquisition of GreatCall in fiscal 2019.

Cash, Cash Equivalents and Restricted Cash

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 2, 2019, and February 3, 2018, were $1,410 million and $524 million, respectively, and the weighted-average interest rates were 2.5% and 1.1%, respectively.

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



	February 2, 2019		February 3, 2018		January 28, 2017
Cash and cash equivalents	$	1,980	$	1,101	$	2,240
Restricted cash included in Other current assets	204		199		193
Total cash, cash equivalents and restricted cash	$	2,184	$	1,300	$	2,433

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

Receivables

Receivables consist primarily of amounts due from vendors for various vendor funding programs, banks for customer credit card and debit card transactions and mobile phone network operators for device sales and commissions. We establish allowances for uncollectible receivables based primarily on historical collection trends. Our allowances for uncollectible receivables were $23 million and $37 million at February 2, 2019, and February 3, 2018, 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. The costs of in-bound freight to move inventory into our distribution centers are included as part of the net cost of merchandise inventories. Also included in the cost of inventory are certain vendor allowances. Costs associated with 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 disposition of inventory and establishes a new cost basis. No adjustment is recorded for inventory that we are able to return to our vendors for full credit. 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.

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 expensed 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 on our Consolidated Balance Sheets. 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.

Estimated useful lives by major asset category are as follows:



Asset	Life (in years)
Buildings	5-35
Leasehold improvements	2-10
Fixtures and equipment	2-15
Property under capital and financing leases	3-7

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

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 a 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 4, 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 2, 2019, and February 3, 2018, the obligation associated with vacant properties included in Accrued liabilities on our Consolidated Balance Sheets was $14 million and $17 million, respectively, and the obligation associated with vacant properties included in Long-term liabilities on our Consolidated Balance Sheets was $11 million and $21 million, respectively. The obligation associated with vacant properties at February 2, 2019, and February 3, 2018, included amounts associated with our restructuring activities as further described in Note 9, 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. For most large-format stores, the remaining life is less than 5 years with one or more renewal options thereafter. Some leases also contain escalation clauses and certain store leases require payments 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 2, 2019, and February 3, 2018, deferred rent included in Accrued liabilities on our Consolidated Balance Sheets was $28 million and $30 million, respectively, and deferred rent included in Long-term liabilities on our Consolidated Balance Sheets was $99 million and $107 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 2, 2019, and February 3, 2018, we had $181 million and $191 million, respectively, outstanding under financing lease obligations. Refer to Note 10, 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 determine whether 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. The two reporting units with goodwill balances at the end of fiscal 2019 were our Domestic and GreatCall operating segments.

Our detailed impairment testing involves a quantitative assessment to compare 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 2019 and 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. In addition, we determined that the fair value of the GreatCall reporting unit exceeded its carrying value in fiscal 2019 and as a result, no goodwill impairment was recorded. The carrying value of goodwill at February 2, 2019, and February 3, 2018, was $915 million and $425 million, respectively.

The following table provides the gross carrying amount of goodwill and cumulative goodwill impairment as of February 2, 2019, and February 3, 2018 ($ in millions):



	February 2, 2019					February 3, 2018
	Gross Carrying Amount		Cumulative Impairment			Gross Carrying Amount		Cumulative Impairment
Goodwill	$	1,590	$	(675	)	$	1,100	$	(675	)

Indefinite-lived Intangible Assets

We have an indefinite-lived tradename related to Pacific Sales included within our Domestic reportable segment, which is recorded within Other assets on our Consolidated Balance Sheets.

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 2019 and fiscal 2018, we determined that the fair value of the tradename exceeded its carrying value, and as a result, no impairment was recorded. The carrying value of the indefinite-lived tradename at February 2, 2019, and February 3, 2018, was $18 million.

Definite-lived Intangible Assets

We have definite-lived intangible assets related to GreatCall included within our Domestic reportable segment, which are recorded within Other assets on our Consolidated Balance Sheets. We had no definite-lived intangible assets as of February 3, 2018. The following table provides the gross carrying amount and related accumulated amortization of definite-lived intangible assets as of February 2, 2019 ($ in millions):



	February 2, 2019
	Gross Carrying Amount		Accumulated Amortization
Customer relationships	$	258	$	16
Tradename	63		3
Developed technology	52		4
Total	$	373	$	23

The following table provides the amortization expense expected to be recognized in future periods ($ in millions):



Fiscal Year	Amortization Expense
2020	$	68
2021	68
2022	67
2023	67
2024	48
Thereafter	32

Insurance

We are self-insured for certain losses related to workers' compensation, medical and general liability claims; however, we obtain third-party excess insurance coverage to limit our exposure to certain claims. Some of these self-insured losses are managed through a wholly-owned insurance captive. Liabilities associated with these losses include estimates of both claims filed and losses incurred but not yet reported. We utilize valuations provided by qualified, independent third-party actuaries as well as internal insurance and risk expertise. Our self-insured liabilities included in our Consolidated Balance Sheets were as follows ($ in millions):



	February 2, 2019		February 3, 2018
Accrued liabilities	$	69	$	67
Long-term liabilities	60		64
Total	$	129	$	131

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 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 2, 2019, and February 3, 2018, were non-income tax liabilities, advertising accruals, income tax accruals, loyalty program liabilities, rent-related liabilities and sales return reserves.

Long-Term Liabilities

The major components of long-term liabilities at February 2, 2019, and February 3, 2018, were unrecognized tax benefits, income tax liabilities, rent-related liabilities and self-insurance reserves.

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 dates. For operations reported on a one-month lag, we use the exchange rates in effect one month prior to our Consolidated Balance Sheet dates. Results of operations and cash flows are translated using the average exchange rates throughout the periods. 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 period presented.

Revenue Recognition

We generate revenue primarily from the sale of products and services, both as a principal and as an agent. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the transaction price consideration that we expect to receive in exchange for those goods or services. Our revenue excludes sales and usage-based taxes collected and is reported net of sales refunds, which includes an estimate of future returns and contract cancellations based on historical refund rates, with a corresponding reduction to cost of sales. For revenue transactions that involve more than one performance obligation, we defer the revenue associated with any unsatisfied performance obligation until the obligation is satisfied, i.e., when control of a product is transferred to the customer or a service is completed. Refer to Note 8, Revenue Recognition, for additional information.

Product Revenue

Product revenue is recognized when control passes, which generally occurs at a point in time when the customer completes a transaction in the store and receives the merchandise. Our payment terms are typically at the point of sale. In the case of items paid for in the store, but subsequently delivered to the customer, control passes and revenue is recognized once delivery has been completed, as we have transferred possession to the customer.

For transactions initiated online, customers choose whether to have it delivered to them (using third-party parcel delivery companies) or to collect their merchandise from one of our stores (“in-store pick up”). For items delivered directly to the customer, control passes and revenue is recognized when delivery has been completed to the customer, as title has passed and we have transferred possession to the customer. For in-store pick up, control passes and revenue is recognized once the customer has taken possession of the merchandise. Any fees charged to customers for delivery are a component of the transaction price and are recognized when delivery has been completed. We use delivery information at an individual contract level to determine when to recognize revenue for products and any related delivery fee revenue.

Generally, we are the principal to the contract as we have control of the physical products prior to transfer to the customer. Accordingly, revenue is recognized on a gross basis. For certain sales, primarily activation-based software licenses and third-party stored-value cards, we are the sales agent providing access to the content and recognize fixed commission revenue net of amounts due to third parties who fulfill the performance obligation. For these sales, control passes upon providing access of the content to the customer.

Warranty obligations associated with the sale of our exclusive brands products are assurance-type warranties that are a guarantee of the product’s intended functionality and, therefore, do not represent a distinct performance obligation within the context of the contract.

Services - When we are the principal

We recognize service revenue for installation, set-up, software troubleshooting, product repair, consultation and educational classes once the service is completed, as this is when the customer has the ability to direct the use of and obtain the benefits of the service or serviced product. Payment terms are typically at the point of sale, but may also occur upon completion of the service. Our service contracts are primarily with retail customers, merchandise vendors (for factory warranty repairs) and third-party underwriters who sell extended warranty protection plans.

For technical support membership contracts, we are responsible for fulfilling the support services to customers. These contracts have terms ranging from one month to three years and typically contain multiple performance obligations. Payment for the membership contracts is due at the start of the contract period. We have determined that our contracts do not include a significant financing component. The primary purpose of our payment terms is to provide customers with a simplified method of purchasing our services, not to provide customers with financing. We recognize revenue over time on a usage basis, an input method of measuring progress over the related contract term. This method is based on historical utilization patterns as this depicts when customers use the services and discounts provided and, accordingly, when delivery of the performance obligation occurs. There is judgment in (1) determining the level at which we apply a portfolio approach to these contracts; (2) measuring the relative standalone selling price for performance obligations within these contracts to the extent that they are only bundled and sold to customers with other performance obligations, or alternatively, using a cost-plus margin approach; and, (3) assessing the pattern of delivery across multiple portfolios of customers, including estimating current and future usage patterns. When insufficient history of usage is available, we generally recognize revenue ratably over the life of the contract.

Services - When we are the agent

We sell various hardware protection plans to customers that provide extended warranty coverage on their device purchases. Such plans have terms ranging from one month to five years. Payment is due at the point of sale. Third-party underwriters assume the risk associated with the coverage and are primarily responsible for fulfillment. We record the fixed net commissions (the amount charged to the customer less the premiums remitted to the underwriter) as revenue at a point in time when the corresponding product revenue is recognized. In addition, we are eligible to receive profit-sharing payments, a form of variable consideration, which are dependent upon the profitable performance of the portfolio. We do not share in any losses of the portfolio. We record any such profit share as revenue once the uncertainty associated with the portfolio period, which is calendar-year based, is no longer constrained using the expected value method. This typically occurs when claims experience for the annual period is known in our fiscal fourth quarter, with payment of the profit share occurring in the subsequent fiscal year. Service and commission revenues earned from the sale of extended warranties represented 2.0%, 2.0% and 2.2% of revenue in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. These percentages include $10 million, $68 million and $133 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively, of profit-share revenue.

We earn fixed commissions from mobile network carriers to sell service contracts on their platforms. Revenue is recognized when control passes at a point in time upon sale of the contract and activation of the customer on the provider’s platform. The time between when we activate the service with the customer and when we receive payment from the content provider is generally within 30 to 60 days, which is after control has passed. Activation commissions are subject to repayment to the carrier primarily due to customer cancellation for specified time periods after the sale. Commission revenue from mobile network carriers is reported net of the expected cancellations, which we estimate based on historical cancellation rates.

Credit Card Revenue

We offer promotional financing and credit cards issued by third-party banks that manage and directly extend credit to our customers. We provide a license to our brand and marketing services, and we facilitate credit applications in our stores and online. The banks are the sole owners of the accounts receivable generated under the program and, accordingly, we do not hold any customer receivables related to these programs and act as an agent in the financing transactions with customers. We are eligible to receive a profit share from certain of our banking partner based on the annual performance of the program, and we receive quarterly payments based on forecasts of full-year performance. This is a form of variable consideration. We record such profit share as revenue over time using the most likely amount method, which reflects the amount earned each quarter when it is determined that the likelihood of a significant revenue reversal is not probable, which is typically quarterly. Profit-share payments occur quarterly, shortly after the end of each program quarter.

Best Buy Gift Cards

We sell Best Buy gift cards to our customers in our retail stores, online and through select third parties. Our gift cards do not expire. We recognize revenue from gift cards when the card is redeemed by the customer. We also recognize revenue for the portion of gift card values that is not expected to be redeemed ("breakage"). We estimate breakage based on historical patterns and other factors, such as laws and regulations applicable to each jurisdiction. We recognize breakage revenue using a method that is consistent with customer redemption patterns. Typically, over 90% of gift card redemptions (and therefore recognition of over 90% of gift card breakage revenue) occur within one year of issuance. There is judgment in assessing (1) the level at which we group gift cards for analysis of breakage rates, (2) redemption patterns, and (3) the ultimate value of gift cards which we do not expect to be redeemed. Gift card breakage income was $34 million, $40 million and $37 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.

Sales Incentives

We frequently offer sales incentives that entitle our customers to receive a gift card at the time of purchase or an instant savings coupon that can be redeemed towards a future purchase. For sales incentives issued to customers that are only earned in conjunction with the purchase of products or services, the sales incentives represent an option that is a material right and, accordingly, is a performance obligation in the contract. The relative standalone selling price of these sales incentives is deferred as a contract liability, based on the cards or coupons that are projected to be redeemed. We recognize revenue for this performance obligation when it is redeemed by the customer or when it is not expected to be redeemed. There is judgment in determining (1) the level at which we group incentives based on similar redemption patterns, (2) future redemption patterns, and (3) the ultimate number of incentives that we do not expect to be redeemed.

We also issue coupons that are not earned in conjunction with a purchase of a product or service, typically as part of targeted marketing activities. This is not a performance obligation, but is recognized as a reduction of the transaction price when redeemed by the customer.

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. Our loyalty programs represent customer options that provide a material right and, accordingly, are performance obligations for each applicable contract. The relative standalone selling price of points earned by our loyalty program members is deferred and included in Accrued liabilities on our Consolidated Balance Sheets based on the percentage of points that are projected to be redeemed. We recognize revenue for this performance obligation over time when a certificate is estimated to be redeemed by the customer. There is inherent judgment in estimating the value of our customer loyalty programs as they are susceptible to factors outside of our influence, particularly customer redemption activity. However, we have significant experience in estimating the amount and timing of redemptions of certificates, based primarily on historical data.

Cost of Goods Sold

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.



Selling, General and Administrative Expenses
•		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.

Selling, General and Administrative Expenses

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.



Selling, General and Administrative Expenses
•		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 funds from certain vendors through a variety of programs and arrangements, primarily in the form of purchases-based or sales-based volumes and for product advertising and placement in our stores. We recognize these funds as a reduction of cost of sales when the associated inventory is sold. If the funds are not specifically related to purchase or sales volumes, the funds are recognized ratably over the performance period as the product promotion is completed. Funds that are determined to be a reimbursement of specific, incremental and identifiable costs incurred to sell a vendor's products are recorded as an offset to the related expense when incurred.

Advertising Costs

Advertising costs, which are included in SG&A, are expensed over the period in which the advertisement is customer-facing. Advertising costs consist primarily of digital and television advertisements, as well as agency fees and production costs. Advertising expenses were $777 million, $776 million and $743 million in fiscal 2019, fiscal 2018 and fiscal 2017, 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. Refer to Note 7, Shareholders' Equity, for additional information regarding the fair value of our equity-based awards under our stock compensation plan. 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.