Sprouts Farmers Market 2013 Annual Report Download - page 80

Table of Contents
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements,
which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. Our
estimates include, but are not limited to, those related to inventory, valuations, lease assumptions, self-insurance reserves,
sublease assumptions for closed stores, goodwill and intangible assets, impairment of long-lived assets, fair values of equity-based
awards and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material
differences between these estimates and our actual results, our future financial statements will be affected.
We believe that of our significant accounting policies, which are described in Note 3 to the audited consolidated financial
statements included in this Annual Report on Form 10-
K, the following accounting policies involve a greater degree of judgment and
complexity. Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of
operations.
Equity-Based Compensation
Following the Henry’s Transaction, we adopted the 2011 Option Plan in May 2011. Grants of options to purchase our shares
under this plan have been for equity instruments exchanged for employee services. We account for equity-based compensation in
accordance with Financial Accounting Standards Board Accounting Standard Codification Topic 718, Compensation—Stock
Compensation (referred to as “ASC 718”). Compensation expense associated with equity incentive grants requires management
judgment to calculate the estimated fair value of awards, which typically vest over multi
-year periods and for which the ultimate
amount of compensation is not known on the date of grant. Time vested options generally vest ratably over a period of 12 quarters
(three years) and performance-based options vest over a period of three years based on financial performance targets for each
year. In the event of a change in control as defined in the 2011 Option Plan, all options become immediately vested and
exercisable.
Our board of directors has adopted, and our equity holders have approved, the 2013 Incentive Plan. The 2013 Incentive Plan
became effective on July 31, 2013 and replaced the 2011 Option Plan (except with respect to outstanding options under the 2011
Option Plan). The 2013 Incentive Plan enables us to formulate and implement a compensation program that will attract, motivate
and retain experienced, highly-qualified team members who will contribute to our financial success, and aligns the interests of our
team members with those of our stockholders through the ability to grant a variety of stock-based and cash-based awards. The
2013 Incentive Plan serves as the umbrella plan for our stock-based and cash-based incentive compensation programs for our
directors, officers and other team members.
Under the provisions of ASC 718, equity-based compensation expense is measured at the grant date, based on the fair value
of the award. As required under this guidance, we estimate forfeitures for options granted which are not expected to vest. Changes
in these inputs and assumptions can materially affect the measurement of the estimated fair value of our equity-based
compensation expense.
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