Sprouts Farmers Market 2013 Annual Report Download - page 102

Table of Contents
Financing Lease Obligations
The Company has recorded financing lease obligations for 38 and 31 store building leases as of December 29, 2013 and
December 30, 2012, respectively. In each case, the Company was deemed to be the owner during the construction period under
lease accounting guidance. Further, each lease contains provisions indicating continuing involvement with the property at the end
of the construction period, which include either an affiliate guaranty or contingent collateral. As a result, in accordance with
applicable accounting guidance, buildings and related assets subject to the leases are reflected on the Company’s balance sheets
and depreciated over their remaining useful lives. The present value of the lease payments associated with these buildings is
recorded as financing lease obligations.
Monthly lease payments are allocated between the land element of the lease (which is accounted for as an operating lease)
and the financing obligation. The financing obligation is amortized using the effective interest method and the interest rate is
determined in accordance with the requirements of sale-leaseback accounting. Lease payments less the portion allocated to the
land element of the lease and that portion considered to be interest expense decrease the financing liability. At the end of the initial
lease term, should the Company decide not to renew the lease, the net book value of the asset and the corresponding financing
obligation would be reversed.
The outflows from the construction of the buildings are classified as investing activities, and the outflows associated with the
financing obligations principal payments and inflows from the associated financing proceeds are classified as financing activities in
the accompanying consolidated statements of cash flows.
Fair Value Measurements
The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in
accordance with GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets
that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active
markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the impairment analysis of
goodwill, intangible assets, long-lived assets and in the valuation of store closure and exit costs.
The determination of fair values of certain tangible and intangible assets for purposes of our goodwill impairment evaluation as
described above was based upon level 3 inputs. Closed store reserves are recorded at net present value to approximate fair value
which is classified as Level 3 in the hierarchy. The estimated fair value of the closed store reserve is calculated based on the
present value of the remaining lease payments and other charges using a weighted average cost of capital, reduced by estimated
sublease rentals. The weighted average cost of capital was estimated using information from comparable companies and
management’s judgment related to the risk associated with the operations of the stores.
Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued
salaries and benefits and other accrued liabilities approximate fair value
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