Whole Foods 2008 Annual Report Download - page 60

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SFAS No. 123R requires the Company to value unvested stock options granted prior to its adoption of SFAS No. 123 under
the fair value method and expense these amounts in the income statement over the stock option’s remaining vesting period.
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 payment expense will not exceed 10%.
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.
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 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 FASB Interpretation No. 48, as amended, “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in tax
positions recognized in the financial statements in accordance with SFAS No, 109, “Accounting for Income Taxes.” 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. See Note 10 to the
consolidated financial statements, “Income Taxes,” for further discussion on the impact of adopting FIN 48.
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, unrealized gains and losses on marketable securities, unrealized gains and
losses on cash flow hedge instruments, and foreign currency translation adjustments, net of income taxes. Comprehensive
income is reflected in the Consolidated Statements of Shareholders’ Equity and Comprehensive Income. At September 28,
2008, accumulated other comprehensive income consisted of foreign currency translation adjustment gains of approximately
$8.0 million and unrealized losses on cash flow hedge instruments of approximately $7.6 million. At September 30, 2007,
accumulated other comprehensive income consisted of foreign currency translation adjustment gains of approximately $15.7
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
In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company
has one operating segment and a single reportable segment, supermarkets emphasizing natural and organic foods. We
currently have six stores in Canada and five stores in the United Kingdom. All of our remaining operations are domestic.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets