Whole Foods 2008 Annual Report Download - page 58

52
subordinated debentures is estimated using quoted market prices. At September 28, 2008 and September 30, 2007, the
difference between the carrying value and the estimated fair value of our convertible debentures is not material.
Derivative Instruments
The Company utilizes derivative financial instruments to hedge its exposure to changes in interest rates. All derivative
financial instruments are recorded on the balance sheet at their respective fair value. The Company does not use financial
instruments or derivatives for any trading or other speculative purposes.
During fiscal year 2008, the Company entered into a three-year interest rate swap agreement with a notional amount of $490
million to effectively fix the interest rate on $490 million of the term loan at 4.718%, excluding the applicable margin and
associated fees, The interest rate swap was designated as a cash flow hedge. The hedge effectiveness is measured by
comparing the change in fair value of the hedge item with the change in fair value of the swap. The effective portion of the
gain or loss of the hedge is recorded on the Consolidated Balance Sheets under the caption “Accumulated other
comprehensive income.” Any ineffective portion of the hedge, as well as amounts not included in the assessment of
effectiveness, is recorded on the accompanying Consolidated Statements of Operations under the caption “Interest expense.”
Hedge ineffectiveness was not material for fiscal year 2008.
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’
compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee
health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by
considering historical claims experience, demographic factors, severity factors and other actuarial assumptions.
Reserves for Closed Properties
The Company maintains reserves for estimated losses on retail stores and other properties that are no longer being utilized in
current operations. The Company provides for closed property operating lease liabilities using a discount rate to calculate the
present value of the remaining noncancelable lease payments after the closing date, net of estimated subtenant income. The
closed property lease liabilities usually are paid over the remaining lease terms, which generally range from one to 16 years.
The Company estimates subtenant income and future cash flows based on the Company’s experience and knowledge of the
area in which the closed property is located, the Company’s previous efforts to dispose of similar assets and existing
economic conditions.
The reserves for closed properties include management’s estimates for lease subsidies, lease terminations and future
payments on exited real estate. At September 28, 2008 and September 30, 2007 these reserves totaled approximately $69.3
million and $97.0 million, respectively.
Capital lease properties that are closed are reduced to their estimated fair value. Reduction in the carrying values of property,
equipment and leasehold improvements are recognized when expected net future cash flows are less than the assets’ carrying
value. The Company estimates net future cash flows based on its experience and knowledge of the area in which the closed
property is located and, when necessary, utilizes local real estate brokers.
Adjustments to closed property reserves primarily relate to changes in existing economic conditions, subtenant income or
actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the
changes become known.
Revenue Recognition
We recognize revenue for sales of our products at the point of sale. Discounts provided to customers at the point of sale are
recognized as a reduction in sales as the products are sold. Sales taxes are not included in revenue.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold includes cost of inventory sold during the period, net of discounts and allowances, contribution from non-
retail distribution and food preparation operations, shipping and handling costs and occupancy costs. The Company receives
various rebates from third party vendors in the form of quantity discounts and payments under cooperative advertising
agreements. Quantity discounts and cooperative advertising discounts in excess of identifiable advertising costs are
recognized as a reduction of cost of goods sold when the related merchandise is sold.
Vendor Rebates and Allowances
The Company receives various rebates from third party vendors in the form of purchase or sales volume discounts and
payments under cooperative advertising agreements. Purchase volume discounts are generally recorded as a reduction of