Kroger 2010 Annual Report Download - page 118

A-38
NO T E S T O CO N S O L I D A T E D FI N A N C I A L ST A T E M E N T S , CO N T I N U E D
first-out (“FIFO”) method. Replacement cost was higher than the carrying amount by $827 at January 29,
2011 and $770 at January 30, 2010. The Company follows the Link-Chain, Dollar-Value LIFO method for
purposes of calculating its LIFO charge or credit.
The item-cost method of accounting to determine inventory cost before the LIFO adjustment is
followed for substantially all store inventories at the Company’s supermarket divisions. This method involves
counting each item in inventory, assigning costs to each of these items based on the actual purchase costs
(net of vendor allowances and cash discounts) of each item and recording the cost of items sold. The item-
cost method of accounting allows for more accurate reporting of periodic inventory balances and enables
management to more precisely manage inventory when compared to the retail method of accounting.
The Company evaluates inventory shortages throughout the year based on actual physical counts
in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to
provide for estimated shortages as of the financial statement date.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation expense, which includes the
amortization of assets recorded under capital leases, is computed principally using the straight-line method
over the estimated useful lives of individual assets. Buildings and land improvements are depreciated based
on lives varying from 10 to 40 years. All new purchases of store equipment are assigned lives varying
from three to nine years. Leasehold improvements are amortized over the shorter of the lease term to
which they relate, which varies from four to 25 years, or the useful life of the asset. Manufacturing plant
and distribution center equipment is depreciated over lives varying from three to 15 years. Information
technology assets are generally depreciated over five years. Depreciation and amortization expense was
$1,600 in 2010, $1,525 in 2009 and $1,443 in 2008.
Interest costs on significant projects constructed for the Company’s own use are capitalized as part
of the costs of the newly constructed facilities. Upon retirement or disposal of assets, the cost and related
accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in net
earnings.
Deferred Rent
The Company recognizes rent holidays, including the time period during which the Company has
access to the property for construction of buildings or improvements and escalating rent provisions on a
straight-line basis over the term of the lease. The deferred amount is included in Other Current Liabilities
and Other Long-Term Liabilities on the Company’s Consolidated Balance Sheets.
Goodwill
The Company reviews goodwill for impairment during the fourth quarter of each year, and also upon
the occurrence of trigger events. The reviews are performed at the operating division level. Generally,
fair value is determined using a multiple of earnings, or discounted projected future cash flows, and is
compared to the carrying value of a division for purposes of identifying potential impairment. Projected
future cash flows are based on management’s knowledge of the current operating environment and
expectations for the future. If potential for impairment is identified, the fair value of a division is measured
against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair