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Transportation equipment 2“5 years
Internally developed software 3 years

Net Income Per Share
Basic net income per share is based on the weighted average outstanding common
shares. Diluted net income per share is based on the weighted average outstanding
shares adjusted for the dilutive effect of stock options and restricted stock grants (16
million, 16 million and 19 million shares in 2003, 2002 and 2001, respectively). The
Company had approximately 10.0 million, 3.5 million and 2.0 million option shares
outstanding at January 31, 2003, 2002 and 2001, respectively, that were not included

302 Reviewing Accounting Policy Disclosures

Exhibit 10.2 (Continued)

in the dilutive earnings per share calculation because the effect would have been
Estimates and Assumptions
The preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assump-
tions. These estimates and assumptions affect the reported amounts of assets and liabili-
ties. They also affect the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Stock-based Compensation
The Company has various stock option compensation plans for Associates. The
Company currently accounts for those plans under the recognition and measurement
provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and
related interpretations. Historically, no significant stock-based employee compensation
has been recognized under APB Opinion No. 25. In August 2002, the Company
announced that on February 1, 2003, it will adopt the expense recognition provisions of
the Financial Accounting Standards Board Statement No. 123, “Accounting and
Disclosure of Stock-Based Compensation” (“FAS 123”). Under FAS 123, compensation
expense is recognized based on the fair value of stock options granted. The Company
has chosen to retroactively restate its results of operations for this accounting change.
The adoption of the fair value method will result in a reduction of retained earnings at
that date of $348 million, representing the cumulative stock option compensation
recorded for prior years net of the tax effect. The Company™s estimates that the impact
of changing the accounting method for the adoption of FAS 123 will have an impact of
$0.02 to $0.03 per share in the year of adoption.
Pro forma information, regarding net income and income per share is required by FAS
Statement 123, “Accounting for Stock-Based Compensation,” (FAS No. 123) and has
been determined as if the Company had accounted for its employee stock option plans
granted since February 1, 1995 under the fair value method of that statement.
The effect of applying the fair value method of FAS No. 123 to the stock option grants
subsequent to February 1, 1995, results in the following net income and net income per
share (amounts in millions except per share data):
Fiscal Years Ended January 31, 2003 2002 2001
Net income as reported $8,039 $6,671 $6,295
Less total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (84) (79) (60)
Pro forma net income 7,955 6,592 6,235
Pro forma earnings per share”basic $1.80 $1.48 $1.40
Pro forma earnings per share”dilutive $1.79 $1.47 $1.39
The fair value of these options was estimated at the date of the grant using the Black-
Scholes option pricing model with the following assumption ranges: risk-free interest
rates between 2.5% and 7.2%, dividend yields between 0.4% and 1.3%, volatility factors
between 0.23 and 0.41, and an expected life of the option of 7.4 years for the options
issued prior to November 17, 1995, and 3 to 7 years for options issued thereafter.
Accounting Policy Disclosures 303

The Black-Scholes option valuation model was developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully transferable. In
addition, option valuation methods require the input of highly subjective assumptions
including the expected stock price volatility. Using the Black-Scholes option evaluation
model, the weighted average value of options granted during the years ended January
31, 2003, 2002, and 2001, were $18, $24, and $22, per option, respectively.

New Accounting Pronouncements
On February 1, 2002, the Company adopted Financial Accounting Standards Board
Statements of Financial Accounting Standards No. 141, “Business Combinations”
(“FAS 141”), and No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). Under
FAS 142, goodwill and intangible assets deemed to have indefinite lives are no longer
amortized but are subject to annual impairment reviews. The following tables adjust
certain information for fiscal 2002 and 2001, as if the non-amortization provisions of
FAS 142 had been in place at that time and compares that adjusted information to the
comparable information for fiscal 2003:
Net Income Basic Earnings Diluted Earnings
(in Millions) Per Share Per Share
2003 2002 2001 2003 2002 2001 2003 2002 2001
As reported $8,039 $6,671 $6,295 $1.81 $1.49 $1.41 $1.81 $1.49 $1.40
Add back:
(net of $11
million tax
impact in
each of
fiscal 2002
and 2001) ” 235 235 ” 0.06 0.05 ” 0.05 0.05
As adjusted $8,039 $6,906 $6,530 $1.81 $1.55 $1.46 $1.81 $1.54 $1.45

During fiscal 2003, the Company adopted FAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” FAS No. 144 develops an accounting
model, based upon the framework established in FAS No. 121, for long-lived assets to
be disposed by sales. The accounting model applies to all long-lived assets, including
discontinued operations, and it replaces the provisions of ABP Opinion No. 30,
“Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions,” for disposal of segments of a business. FAS No. 144 requires long-lived
assets held for disposal to be measured at the lower of carrying amount or fair values
less costs to sell, whether reported in continuing operations or in discontinued opera-
tions. The adoption of FAS No. 144 did not have a material impact on the Company™s
financial position or results of operations.
In August 2001, the FASB issued FAS No. 143, “Accounting for Asset Retirement
Obligations.” This statement requires the Company to recognize the fair value of a lia-
bility associated with the cost the Company would be obligated to incur in order to
retire an asset at some point in the future. The liability would be recognized in the peri-
od in which it is incurred and can be reasonably estimated. The standard is effective for
fiscal years beginning after June 15, 2002. The Company will adopt this standard at the

304 Reviewing Accounting Policy Disclosures

beginning of its fiscal 2004. The Company believes the adoption of FAS No. 143 will
not have a material impact on its financial position or results of operations.
In July 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities.” FAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and replaces EITF Issue No. 94-3,
“Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).” FAS No. 146
requires that a liability for a cost associated with an exit or disposal activity be recog-
nized when the liability is incurred. FAS No. 146 also establishes that fair value is the
objective for initial measurement of the liability. The statement is effective for exit or
disposal activities initiated after December 31, 2002. The Company believes the adop-
tion of FAS No. 146, which will occur in fiscal 2004, will not have a material impact on
its financial position or results of operations.
In November 2002, the FASB™s Emerging Issues Task Force (EITF) reached a consen-
sus on EITF 02-16 “Accounting by a Reseller for Cash Consideration Received from a
Vendor,” which addresses the accounting for ˜Cash Consideration™ (which includes slot-
ting fees, cooperative advertising payments etc.) and ˜Rebates or Refunds™ from a ven-
dor that are payable only if the merchant completes a specified cumulative level of pur-
chases or remains a customer of the vendor for a specified period of time. With regards
to the ˜cash considerations,™ the EITF agreed that the consideration should be treated as
a reduction of the prices of the vendor products or services and should therefore be
included as a reduction of cost of sales unless the vendor receives, or will receive, an
identifiable benefit in exchange for the consideration. With respect to the accounting for
a rebate or refund again, the EITF agreed that such refunds or rebates should be recog-
nized as a reduction of the cost of sales based on a systematic and rational allocation of
the consideration to be received. This guidance should be applied prospectively to
arrangements entered into after December 15, 2002. The Company is currently evaluat-
ing the impact of this new guidance which will be applied in the first quarter of fiscal
Certain reclassifications have been made to prior periods to conform to current

Source: Wal-Mart Stores, Inc., 2003 Annual Report, pp. 34“38.

criteria used by management in their selection of the accounting principles and
methods. Proactive discussions between the audit committee and the company™s
senior management and auditor about critical accounting policies are appropriate.
In May 2002, the Commission proposed rules to require disclosures that would en-
hance investors™ understanding of the application of companies™ critical accounting
policies. The May 2002 proposed rules cover (1) accounting estimates a company
makes in applying its accounting policies and (2) the initial adoption by a company
of an accounting policy that has a material impact on its financial presentation.
Under the first part of those proposed rules, a “critical accounting estimate” is de-
fined as an accounting estimate recognized in the financial statements (1) that re-
Accounting Policy Disclosures 305

quires the registrant to make assumptions about matters that are highly uncertain at
the time the accounting estimate is made and (2) for which different estimates that
the company reasonably could have used in the current period, or changes in the ac-
counting estimate that are reasonably likely to occur from period to period, would
have a material impact on the presentation of the registrant™s financial condition,
changes in financial condition or results of operations. The May 2002 proposed rules
outline certain disclosures that a company would be required to make about its crit-
ical accounting estimates. In addition, under the second part of the May 2002 pro-
posed rules, a company would be required to make certain disclosures about its
initial adoption of accounting policies, including the choices the company had
among accounting principles.
Accountants and issuers should read and refer to the December 2001 Cautionary
Guidance to determine the types of matters that should be communicated to the
audit committee under this rule. We are not requiring that those discussions follow a
specific form or manner, but we expect, at a minimum, that the discussion of critical
accounting estimates and the selection of initial accounting policies will include the
reasons why estimates or policies meeting the criteria in the Guidance are or are not
considered critical and how current and anticipated future events impact those de-
terminations. In addition, we anticipate that the communications regarding critical
accounting policies will include an assessment of management™s disclosures along
with any significant proposed modifications by the accountants that were not in-
2. Alternative Accounting Treatments
We recognize that the complexity of financial transactions results in accounting an-
swers that are often the subject of significant debate between management and the
accountants. Some commenters to the proposed rules suggested that this rule be re-
stricted to material accounting alternatives. These commenters indicated that re-
stricting these communications will assist audit committee members by focusing
their attention on important accounting alternatives. One commenter believes that
only alternative treatments under GAAP that were the subject of serious considera-
tion and debate by the accountant and management should be communicated to the
audit committee.
We understand the concerns expressed and, accordingly, we have clarified the final
rule. Providing audit committees with information on material accounting alterna-
tives is consistent with the objectives of the Act and will minimize the risk that audit
committee members will be distracted from material accounting policy matters by
the numerous discussions between the accountant and management on the applica-
tion of accounting principles to relatively small transactions or events. Therefore,
these rules require communication, either orally or in writing, by accountants to
audit committees of all alternative treatments within GAAP for policies and practices
related to material items that have been discussed with management, including the
ramifications of the use of such alternative treatments and disclosures and the treat-
ment preferred by the accounting firm. This rule is intended to cover recognition,
measurement, and disclosure considerations related to the accounting for specific
transactions as well as general accounting policies.
We believe that communications regarding specific transactions should identify, at a
minimum, the underlying facts, financial statement accounts impacted, and applica-
bility of existing corporate accounting policies to the transaction. In addition, if the
306 Reviewing Accounting Policy Disclosures

accounting treatment proposed does not comply with existing corporate accounting
policies, or if an existing corporate accounting policy is not applicable, then an
explanation of why the existing policy was not appropriate or applicable and the
basis for the selection of the alternative policy should be discussed. Regardless of
whether the accounting policy selected preexists or is new, the entire range of alter-
natives available under GAAP that were discussed by management and the accoun-
tants should be communicated along with the reasons for not selecting those
alternatives. If the accounting treatment selected is not, in the accountant™s view, the
preferred method, we expect that the reasons why the accountant™s preferred method
was not selected by management also will be discussed.
Communications regarding general accounting policies should focus on the initial
selection of and changes in significant accounting policies, as required by GAAS,
and should include the impact of management™s judgments and accounting esti-
mates, as well as the accountant™s judgments about the quality of the entity™s ac-
counting principles. The discussion of general accounting policies should include the
range of alternatives available under GAAP that were discussed by management and
the accountants along with the reasons for selecting the chosen policy. If an existing
accounting policy is being modified, then the reasons for the change also should be
communicated. If the accounting policy selected is not the accountant™s preferred
policy, then we expect the discussions to include the reasons why the accountant con-
sidered one policy to be preferred but that policy was not selected by management.
The separate discussion of critical accounting policies and practices is not consid-
ered a substitute for communications regarding general accounting policies, since the
discussion about critical accounting policies and practices might not encompass any
new or changed general accounting policies and practices. Likewise, this discussion
of general accounting policies and practices is not intended to dilute the communi-
cations related to critical accounting policies and practices, since the issues affecting
critical accounting policies and practices, such as sensitivities of assumptions and
others, may be tailored specifically to events in the current year, and the selection of
general accounting policies and practices should consider a broad range of transac-
tions over time.

3. Other Material Written Communications
We understand written communications between accountants and management range
from formal documents, such as engagement letters, to informal correspondence,
such as administrative items. We also acknowledge that historically not all forms of
written communications provided to management have been provided to the audit
committee. Our rule is intended to implement Section 205 of the Sarbanes-Oxley
Act, which clarified the substance of information that should be provided by ac-
countants to audit committees to facilitate accountant and management oversight by
those committees.
The Sarbanes-Oxley Act specifically cites the management letter and schedules of
unadjusted differences as examples of material written communications to be pro-


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