Harris Teeter 2007 Annual Report Download - page 24

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Company’s consolidated balance sheets. In addition, the Company occasionally utilizes documentary letters of
credit for the purchase of merchandise in the normal course of business. Issued and outstanding letters of credit
totaled $23.2 million at September 30, 2007.
Off Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to
have, a current or future material effect on the Company’s financial condition, results of operations or cash
flows.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions about future events that affect the reported amounts
of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. Future events
and their effects cannot be determined with absolute certainty. Therefore, management’s determination of
estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in
the selection and application of assumptions based on various factors including historical experience, current
and expected economic conditions and other factors believed to be reasonable under the circumstances. Actual
results could differ from those estimates. The Company constantly reviews the relevant, significant factors and
makes adjustments where the facts and circumstances dictate.
Management has identified the following accounting policies as the most critical in the preparation of the
Company’s financial statements because they involve the most difficult, subjective or complex judgments about
the effect of matters that are inherently uncertain.
Vendor Rebates, Credits and Promotional Allowances
Consistent with standard practices in the retail industry, Harris Teeter receives allowances from vendors
through a variety of programs and arrangements. Given the highly promotional nature of the retail supermarket
industry, the allowances are generally intended to defray the costs of promotion, advertising and selling the
vendor’s products. Examples of such arrangements include, but are not limited to, promotional, markdown and
rebate allowances; cooperative advertising funds; volume allowances; store opening discounts and support; and
slotting, stocking and display allowances. The amount of such allowances may be determined on the basis of (1)
a fixed dollar amount negotiated with the vendor, (2) an amount per unit purchased or as a percentage of total
purchases from the vendor, or (3) amounts based on sales to the customer, number of stores, in-store displays
or advertising. The proper recognition and timing of accounting for these items are significant to the reporting
of the results of operations of the Company. The Company applies the authoritative guidance of SEC Staff
Accounting Bulletin No. 104 (“SAB No. 104”) – Revenue Recognition, Emerging Issues Task Force Issue No.
02-16 (“EITF 02-16”) – Accounting by a Customer (Including a Reseller) for Certain Considerations Received
from a Vendor, and other authoritative guidance as appropriate. Under SAB No. 104, revenue recognition
requires, as a prerequisite, the completion of the earnings process and its realization or assurance of realizability.
Vendor rebates, credits and other promotional allowances that relate to Harris Teeter’s buying and merchandising
activities, including lump-sum payments associated with long-term contracts, are recorded as a component of
cost of sales as they are earned, the recognition of which is determined in accordance with the underlying
agreement with the vendor, the authoritative guidance and completion of the earning process. Portions of vendor
allowances that are refundable to the vendor, in whole or in part, by the nature of the provisions of the contract
are deferred from recognition until realization is reasonably assured.
Harris Teeter’s practices are in accordance with EITF 02-16 and are based on the premise that the
accounting for these vendor allowances should follow the economic substance of the underlying transactions,
which is evidenced by the agreement with the vendor as long as the allowance is distinguishable from the
merchandise purchase. Consistent with this premise, Harris Teeter recognizes allowances when the purpose for