Harris Teeter 2012 Annual Report Download - page 35

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The Company records an accrual for the estimated amount of self-insured healthcare IBNR claims. These liabilities are
recorded based on historical experience, which is monitored, and accruals are adjusted when warranted by changes in facts and
circumstances.
Deferred Rent
The Company recognizes rent holidays, including the period of time the Company has access prior to the store opening,
which typically includes construction and fixturing activity, and rent escalations on a straight-line basis over the term of the
lease. The deferred rent amount is included in Other Long-Term Liabilities on the Company’s Consolidated Balance Sheets.
The Company expenses construction period rent as incurred.
Derivatives
The Company has historically utilized derivative financial instruments to hedge its exposure to changes in interest rates.
As of the end of fiscal 2012, there were no outstanding interest rate hedge agreements. All derivative financial instruments are
recorded on the balance sheet at their respective fair value. The Company does not use financial instruments or derivatives for
any trading or other speculative purposes.
Derivatives are required to be carried at fair value on the balance sheet and receives hedge accounting treatment when
certain conditions are met. In accordance with this standard, the Company’s derivative financial instruments are recognized on
the balance sheet at fair value. Changes in the fair value of derivative instruments designated as “cash flow” hedges, to the extent
the hedges are highly effective, are recorded in other comprehensive income, net of tax effects. Ineffective portions of cash flow
hedges, if any, are recognized in current period earnings. Other comprehensive income or loss is reclassified into current period
earnings when the hedged transaction affects earnings.
The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging
instruments are highly effective in offsetting the changes in the cash flow of the hedge items. If it is determined that a derivative
is not highly effective as a hedge or ceases to be highly effective, the Company will discontinue hedge accounting prospectively.
The Company enters into purchase commitments for a portion of the fuel utilized in its distribution operations. The
Company expects to take delivery of and to utilize these resources in a reasonable period of time and in the conduct of normal
business. Accordingly, these fuel purchase commitments qualify as normal purchases. The Company also utilizes derivative
financial instruments to hedge its exposure in the price variations of fuel. In addition, from time to time the Company will enter
into commodity forward contracts related to the purchase of ingredients used in production processes. These contracts generally
qualify for the normal purchase exception under guidance for derivative instruments and hedging activity.
By entering into derivative instrument contracts, the Company exposes itself, from time to time, to counterparty credit risk.
Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair
value of a derivative contract is in an asset position, the counterparty has a liability to the Company, which creates credit risk
for the Company. The Company attempts to minimize this risk by selecting counterparties with investment grade credit ratings,
limiting its exposure to any single counterparty and regularly monitoring its market position with each counterparty.
The Company’s derivative instruments do not contain any credit-risk related contingent features.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or
liability at the measurement date (the exit price). The fair value should be based on assumptions that market participants would
use when pricing the asset or liability. The fair value hierarchy “the valuation hierarchy” that prioritizes the information used
in measuring fair value is as follows:
•Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
•Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly
or indirectly
HARRIS TEETER SUPERMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
31