Kroger 2013 Annual Report Download - page 111

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A-38
NO T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S , CO N T I N U E D
Property, Plant and Equipment
Property, plant and equipment are recorded at cost or, in the case of assets acquired in a business
combination, at fair value. 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 expense was $1,703 in 2013, $1,652 in 2012 and $1,638 in 2011.
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 Company performs reviews of each of its operating divisions and
variable interest entities (collectively, our reporting units) that have goodwill balances. 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 value of the division’s
goodwill. Goodwill impairment is recognized for any excess of the carrying value of the division’s goodwill
over the implied fair value. Results of the goodwill impairment reviews performed during 2013, 2012 and 2011
are summarized in Note 3 to the Consolidated Financial Statements.
Impairment of Long-Lived Assets
The Company monitors 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, an impairment calculation is performed, comparing projected undiscounted
future cash flows, utilizing current cash flow information and expected growth rates related to specific stores,
to the carrying value for those stores. If the Company identifies impairment for long-lived assets to be held and
used, the Company compares the assets’ current carrying value to the assets’ fair value. Fair value is based on
current market values or discounted future cash flows. The Company records impairment when the carrying
value exceeds fair market value. With respect to owned property and equipment held for sale, the value of the
property and equipment is adjusted to reflect recoverable values based on previous efforts to dispose of similar
assets and current economic conditions. Impairment is recognized for the excess of the carrying value over
the estimated fair market value, reduced by estimated direct costs of disposal. The Company recorded asset
impairments in the normal course of business totaling $39, $18 and $37 in 2013, 2012 and 2011, respectively.
Costs to reduce the carrying value of long-lived assets for each of the years presented have been included in
the Consolidated Statements of Operations as “Operating, general and administrative” expense.