Harris Teeter 2012 Annual Report Download - page 33

resulting gross margins are calculated by applying a calculated cost-to-retail ratio to the retail value of inventories. LIFO indices
are developed approximately one month prior to year end except for inventory held at the Company’s distribution facilities which
are developed at year end. The annual LIFO measurement is achieved by applying the indices to the actual inventory on hand
as of year end.
Vendor Rebates, Credits and Promotional Allowances
Consistent with standard practices in the retail industry, the Company receives allowances from vendors through a variety of
programs and arrangements. These allowances are generally intended to defray the costs of promotion, advertising and selling the
vendor’s products. Vendor rebates, credits and other promotional allowances that relate to 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.
The Company recognizes allowances when it fulfills the purpose for which the vendor funds were intended and the Company
incurs a cost. Thus, it is the Company’s policy to recognize the vendor allowance consistent with the timing of the recognition of
the expense that the allowance is intended to reimburse and to determine the accounting classification consistent with the economic
substance of the underlying transaction. Where the Company provides an identifiable benefit or service to the vendor apart from the
purchase of merchandise, that transaction is recorded separately. For example, co-operative advertising allowances are accounted for
as a reduction of advertising expense in the period in which the advertising cost is incurred. If the advertising allowance exceeds the
cost of advertising, then the excess is recorded against the cost of sales in the period in which the related expense is recognized.
Vendor allowances for price markdowns are credited to the cost of sales during the period in which the related markdown
was taken and charged to the cost of sales. Slotting and stocking allowances received from a vendor to ensure that its products
are carried or to introduce a new product are recorded as a reduction of cost of sales over the period covered by the agreement
with the vendor based on the estimated inventory turns of the merchandise to which the allowance applies. Display allowances
are recognized as a reduction of cost of sales in the period earned in accordance with the vendor agreement. Volume rebates
by the vendor in the form of a reduction of the purchase price of the merchandise reduce the cost of sales when the related
merchandise is sold. Generally, volume rebates under a structured purchase program with allowances awarded based on the
level of purchases are recognized, when realization is assured, as a reduction in the cost of sales in the appropriate monthly
period based on the actual level of purchases in the period relative to the total purchase commitment and adjusted for the
estimated inventory turns of the merchandise.
Property and Depreciation
Property is recorded at cost and is depreciated, using principally the straight-line method, over the following useful lives:
Land improvements 10-40 years
Buildings 15-40 years
Machinery and equipment 3-15 years
Leasehold improvements are depreciated over the lesser of the estimated useful life or the remaining term of the lease.
Assets under capital leases are amortized on a straight-line basis over the lesser of the estimated useful life or the lease term.
Refer to Note 3 below for the amount of depreciation and amortization expense recorded in the reporting periods. Maintenance
and repairs are charged against income when incurred. Expenditures for major renewals, replacements and betterments are added
to property. The cost and the related accumulated depreciation of assets retired are eliminated from the accounts with gains or
losses on disposal being added to or deducted from income.
Impairment of Other Long-lived Assets and Closed Store Obligations
The Company assesses its other long-lived assets for possible impairment whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying
amount to the net non-discounted cash flows expected to be generated by the asset. An impairment loss is recognized for any
excess of net book value over the estimated fair value of the asset impaired, and recorded as an offset to the asset value. The
fair value is estimated based on expected future cash flows or third party valuations, if available.
HARRIS TEETER SUPERMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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