Kroger 2013 Annual Report Download - page 90

A-17
CR I T I C A L A C C O U N T I N G P O L I C I E S
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our
operating results and financial position, and we apply those accounting policies in a consistent manner. Our
significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements.
The preparation of financial statements in conformity with 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 February
1, 2014. 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 $2 million. General liability claims are not discounted.
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 value over the
estimated fair market value, reduced by estimated direct costs of disposal. We recorded asset impairments in
the normal course of business totaling $39 million in 2013, $18 million in 2012 and $37 million in 2011. We
record costs to reduce the carrying value of long-lived assets in the Consolidated Statements of Operations as
“Operating, general and administrative” expense.