Whole Foods 2009 Annual Report Download - page 53

Fair Value of Financial Instruments
The Company records its financial assets and liabilities at fair value, in accordance with the framework for measuring fair
value in generally accepted accounting principles. This framework establishes a fair value hierarchy that prioritizes the inputs
used to measure fair value:
• Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
• Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly.
• Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that
result in management’s best estimate of fair value.
The provisions of ASC 820, “Fair Value Measurements and Disclosures,” are effective for the Company’s nonfinancial
assets and liabilities beginning in the first quarter of fiscal year ended September 26, 2010.
The Company holds money market fund investments that are classified as either cash equivalents or restricted cash that are
measured at fair value on a recurring basis, based on quoted prices in active markets for identical assets. We had cash
equivalent instruments and restricted cash investments totaling approximately $439.0 million and $70.4 million, respectively,
at September 27, 2009. The carrying amount of the Company’s interest rate swap agreement is measured at fair value on a
recurring basis using a standard valuation model that incorporates inputs other than quoted prices that are observable.
Declines in fair value below the Company’s carrying value deemed to be other than temporary are charged against net
earnings. Details on the fair value of the Company’s interest rate swap agreement are included in Note 9 to the consolidated
financial statements, “Derivatives.”
The carrying amounts of trade and other accounts receivable, trade accounts payable, accrued payroll, bonuses and team
member benefits, and other accrued expenses approximate fair value because of the short maturity of those instruments.
Store closure reserves and estimated workers’ compensation claims are recorded at net present value to approximate fair
value. The carrying amount of our five-year term loan and revolving line of credit approximates fair value because each has a
variable interest rate which reflects market changes to interest rates and contains variable risk premiums based on the
Company’s corporate ratings.
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. Hedge effectiveness is measured by comparing the
change in fair value of the hedged item with the change in fair value of the derivative instrument. 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 (loss).” Any ineffective portion of the hedge, as well as amounts not included in the assessment of
effectiveness, is recorded on the Consolidated Statements of Operations under the caption “Interest expense.”
Effective January 19, 2009 the Company adopted amendments to FASB guidance on ASC 815, “Derivatives and Hedging,”
that establishes, among other things, the disclosure requirements for derivative instruments and hedging activities. The
guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features
in derivative agreements.
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. The
Company had insurance payables totaling approximately $86.9 million and $86.7 million at September 27, 2009 and
September 28, 2008, respectively, included in the “Other current liabilities” line item on the Consolidated Balance Sheets.
Reserves for Closed Properties
The Company maintains reserves for 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 present value of the remaining noncancelable
lease payments and lease termination fees after the closing date, net of estimated subtenant income. The closed property lease
liabilities are expected to be 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.
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