Whole Foods 2007 Annual Report Download - page 55

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In the fourth quarter of fiscal year 2005, the Company accelerated the vesting of all outstanding stock options, except options
held by the members of the executive team and certain options held by team members in the United Kingdom, in order to
prevent past option grants from having an impact on future results. The Company intends to keep its broad-based stock
option program in place, but also intends to limit the number of shares granted in any one year so that annual earnings per
share dilution from share-based payments expense will not exceed 10%.
Prior to the adoption of SFAS No. 123R, the Company presented the tax savings resulting from tax deductions resulting from
the exercise of stock options as an operating cash flow, in accordance with Emerging Issues Task Force (“EITF”) Issue No.
00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option.” SFAS No. 123R requires the Company to reflect the tax savings resulting from tax
deductions in excess of expense reflected in its financial statements as a financing cash flow.
In November 2005, the FASB issued Staff Position No. FAS 123R-3, “Transition Election Related to Accounting for the Tax
Effects of the Share-Based Payment Awards” (“FSP FAS 123R-3”). The Company has elected to adopt the transition
guidance for the additional paid-in-capital pool (“APIC pool”) in paragraph 81 of SFAS No. 123R. The prescribed transition
method is a detailed method to establish the beginning balance of the APIC pool related to the tax effects of share-based
compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statement of Cash Flows of the
tax effects of share-based payment awards that are outstanding upon adoption of SFAS No. 123R.
Income Taxes
We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to
differences between the book basis and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
reverse. Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period that includes the
enactment date. Significant accounting judgment is required in determining the provision for income taxes and related
accruals, deferred tax assets and liabilities. The Company believes that its tax positions are consistent with applicable tax, but
certain positions may be challenged by taxing authorities. In evaluating liabilities associated with its various tax filing
positions, the Company has accrued for probable liabilities in accordance with the requirements of SFAS No. 5, “Accounting
for Contingencies.” The Company records these tax contingencies to address the potential exposures that can result from the
diverse interpretations of tax statutes, rules and regulations. In the ordinary course of business, there are transactions and
calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by
the IRS and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual results
could differ from these estimates.
Earnings per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during the fiscal period.
Diluted earnings per share is based on the weighted average number of common shares outstanding plus, where applicable,
the additional common shares that would have been outstanding as a result of the conversion of dilutive options and
convertible debt.
Comprehensive Income
Comprehensive income consists of net income, foreign currency translation adjustments, and unrealized gains and losses on
marketable securities, net of income taxes. Comprehensive income is reflected in the Consolidated Statements of
Shareholders’ Equity and Comprehensive Income. At September 30, 2007, accumulated other comprehensive income
consisted of foreign currency translation adjustment gains of approximately $15.7 million. At September 24, 2006,
accumulated other comprehensive income consisted of foreign currency translation adjustment gains of approximately $6.9
million and unrealized gains on marketable securities of approximately $0.1 million.
Foreign Currency Translation
The Company’s Canadian and United Kingdom operations use their local currency as their functional currency. Assets and
liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at
the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a separate component
of accumulated other comprehensive income.
Segment Information
We operate in one reportable segment, natural and organic foods supermarkets. We currently have seven stores in Canada
and six stores in the United Kingdom. All of our remaining operations are domestic.