Whole Foods 2008 Annual Report Download - page 44

over LIFO carrying value, or LIFO reserve, was approximately $32.7 million and $20.0 million at September 28, 2008 and
September 30, 2007, respectively. Costs for remaining inventories are determined by the first-in, first-out (“FIFO”) method.
Cost was determined using the retail method and the item cost method for inventories in fiscal years 2008 and 2007. Under
the retail method, the valuation of inventories at cost and the resulting gross margins are determined by counting each item in
inventory, then applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent
in the retail inventory method calculations are certain management judgments and estimates which could impact the ending
inventory valuation at cost as well as the resulting gross margins. The item cost method involves counting each item in
inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances) of each item
and recording the actual cost of items sold. The item cost method of accounting enables management to more precisely
manage inventory and purchasing levels when compared to the retail method of accounting.
Our cost-to-retail ratios contain uncertainties because the calculation requires management to make assumptions and to apply
judgment regarding inventory mix, inventory spoilage and inventory shrink. Because of the significance of the judgments
and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or
if the underlying circumstances were to change. A 10% difference in our cost-to-retail ratios at September 28, 2008, would
have affected net income by approximately $3.4 million for fiscal year 2008.
Goodwill and Intangible Assets
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed. Goodwill is reviewed for impairment annually at the beginning of the Company’s fourth
fiscal quarter, or more frequently if impairment indicators arise, on a reporting unit level. We allocate goodwill to one
reporting unit for goodwill impairment testing. We determine fair value utilizing both a market value method and discounted
projected future cash flows compared to our carrying value for the purpose of identifying impairment. Our annual
impairment review requires extensive use of accounting judgment and financial estimates. Application of alternative
assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce
significantly different results. Because of the significance of the judgments and estimation processes, it is likely that
materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to
change.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to
sell. Application of alternative assumptions, such as changes in estimate of future cash flows, could produce significantly
different results. Because of the significant of the judgments and estimation processes, it is likely that materially different
amounts could be recorded if we used different assumptions of if the underlying circumstances were to change.
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. 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.
On October 1, 2007, the Company adopted FIN 48, which clarifies the accounting for uncertainty in income tax positions
recognized in the financial statements in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109.
Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on
measurement, classification, interest and penalties associated with tax positions, and income tax disclosures.
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