Sara Lee 2013 Annual Report Download - page 26

CRITICAL ACCOUNTING ESTIMATES
The company’s summary of significant accounting policies is
discussed in Note 2 – Summary of Significant Accounting Policies.
The application of certain of these policies requires significant
judgments or a complex estimation process that can affect the
results of operations and financial position of the company, as well
as the related footnote disclosures. The company bases its estimates
on historical experience and other assumptions that it believes are
most likely to occur. If actual amounts are ultimately different from
previous estimates, the revisions are included in the company’s
results of operations for the period in which the actual amounts
become known, and, if material, are disclosed in the financial state-
ments. The disclosures below also note situations in which it is
reasonably likely that future financial results could be impacted by
changes in these estimates and assumptions. The term reasonably
possible refers to an occurrence that is more than remote but less
than probable in the judgment of management.
SALES RECOGNITION AND INCENTIVES
Sales are recognized when title and risk of loss pass to the customer.
Reserves for uncollectible accounts are based upon historical collection
statistics, current customer information, and overall economic condi-
tions. These estimates are reviewed each quarter and adjusted based
upon actual experience. The reserves for uncollectible trade receivables
are disclosed and trade receivables due from customers that the com-
pany considers highly leveraged are presented in Note 15 – Financial
Instruments. The company has a significant number of individual
accounts receivable and a number of factors outside of the company’s
control that impact the collectibility of a receivable. It is reasonably
likely that actual collection experience will vary from the assumptions
and estimates made at the end of each accounting period.
The Notes to the Consolidated Financial Statements specify a
variety of sales incentives that the company offers to resellers and
consumers of its products. Measuring the cost of these incentives
requires, in many cases, estimating future customer utilization and
redemption rates. Historical data for similar transactions are used in
estimating the most likely cost of current incentive programs. These
estimates are reviewed each quarter and adjusted based upon actual
experience and other available information. The company has a sig-
nificant number of trade incentive programs and a number of factors
outside of the company’s control that impact the ultimate cost of
these programs. It is reasonably likely that actual experience will
vary from the assumptions and estimates made at the end of each
accounting period.
INVENTORY VALUATION
Inventory is carried on the balance sheet at the lower of cost or
market. Obsolete, damaged and excess inventories are carried at net
realizable value. Historical recovery rates, current market conditions,
future marketing, sales plans and spoilage rates are key factors used
by the company in assessing the most likely net realizable value of
obsolete, damaged and excess inventory. These factors are evaluated
at a point in time and there are inherent uncertainties related to
determining the recoverability of inventory. It is reasonably likely
that market factors and other conditions underlying the valuation
of inventory may change in the future.
IMPAIRMENT OF PROPERTY
Property is tested for recoverability whenever events or changes
in circumstances indicate that its carrying value may not be recover-
able. Such events include significant adverse changes in the business
climate, the impact of significant customer losses, current period
operating or cash flow losses, forecasted continuing losses, or a
current expectation that an asset group will be disposed of before
the end of its useful life or spun-off. Recoverability of property is
evaluated by a comparison of the carrying amount of an asset or
asset group to future net undiscounted cash flows expected to be
generated by the asset or asset group. If these comparisons indicate
that an asset is not recoverable, the impairment loss recognized is
the amount by which the carrying amount of the asset exceeds the
estimated fair value. When an impairment loss is recognized for
assets to be held and used, the adjusted carrying amount of those
assets is depreciated over its remaining useful life. Restoration of
a previously recognized impairment loss is not allowed.
There are inherent uncertainties associated with these judgments
and estimates and it is reasonably likely that impairment charges
can change from period to period. Note 4 – Impairment Charges
discloses the impairment charges recognized by the company and
the factors which caused these charges. It is also reasonably likely
that the sale of a business can result in the recognition of an impair-
ment that differs from that anticipated prior to the closing date. Given
the company’s ongoing efforts to improve operating efficiency, it is
reasonably likely that future restructuring actions could result in
decisions to dispose of other assets before the end of their useful life
and it is reasonably likely that the impact of these decisions would
result in impairment and other related costs including employee
severance that in the aggregate would be significant.
24 The Hillshire Brands Company
FINANCIAL REVIEW