Kroger 2015 Annual Report Download - page 91

A-17
CRITICAL ACCOUNTING POLICIES
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 January 30, 2016. 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 triggering 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 triggering 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 $46 million in 2015, $37 million in 2014 and $39 million in 2013. We record costs
to reduce the carrying value of long-lived assets in the Consolidated Statements of Operations as
“Operating, general and administrative” expense.