Kroger 2010 Annual Report Download - page 94

A-14
The preparation of financial statements in conformity with generally accepted accounting principles
(“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. We base our
estimates on historical experience and other factors we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ from those estimates.
We believe that the following accounting policies are the most critical in the preparation of our
financial statements because they involve the most difficult, subjective or complex judgments about the
effect of matters that are inherently uncertain.
Self-Insurance Costs
We primarily are self-insured for costs related to workers’ compensation and general liability claims.
The liabilities represent our best estimate, using generally accepted actuarial reserving methods, of the
ultimate obligations for reported claims plus those incurred but not reported for all claims incurred
through January 29, 2011. We establish case reserves for reported claims using case-basis evaluation of the
underlying claim data and we update as information becomes known.
For both workers’ compensation and general liability claims, we have purchased stop-loss coverage
to limit our exposure to any significant exposure on a per claim basis. We are insured for covered costs
in excess of these per claim limits. We account for the liabilities for workers’ compensation claims on a
present value basis utilizing a risk-adjusted discount rate. A 25 basis point decrease in our discount rate
would increase our liability by approximately $5 million. General liability claims are not discounted.
We are also similarly self-insured for property-related losses. We have purchased stop-loss coverage
to limit our exposure to losses in excess of $25 million on a per claim basis, except in the case of an
earthquake, for which stop-loss coverage is in excess of $50 million per claim, up to $200 million per claim
in California and $300 million outside of California.
The assumptions underlying the ultimate costs of existing claim losses are subject to a high degree
of unpredictability, which can affect the liability recorded for such claims. For example, variability in
inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly,
changes in legal trends and interpretations, as well as a change in the nature and method of how claims are
settled can affect ultimate costs. Our estimates of liabilities incurred do not anticipate significant changes
in historical trends for these variables, and any changes could have a considerable effect on future claim
costs and currently recorded liabilities.
Impairments of Long-Lived Assets
We monitor the carrying value of long-lived assets for potential impairment each quarter based on
whether certain trigger events have occurred. These events include current period losses combined with a
history of losses or a projection of continuing losses or a significant decrease in the market value of an asset.
When a trigger event occurs, we perform an impairment calculation, comparing projected undiscounted
cash flows, utilizing current cash flow information and expected growth rates related to specific stores,
to the carrying value for those stores. If we identify impairment for long-lived assets to be held and used,
we compare the assets’ current carrying value to the assets’ fair value. Fair value is determined based on
market values or discounted future cash flows. We record impairment when the carrying value exceeds
fair market value. With respect to owned property and equipment held for disposal, we adjust the value
of the property and equipment to reflect recoverable values based on our previous efforts to dispose of
similar assets and current economic conditions. We recognize impairment for the excess of the carrying