Whole Foods 2010 Annual Report Download - page 32

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We have not made any material changes in the accounting methodology used to establish our insurance and self-insured
liabilities during the past three fiscal years.
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% change in our insurance
and self-insured liabilities at September 26, 2010 would have affected net income by approximately $6.0 million for fiscal
year 2010.
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 discount rate to calculate the present value of
the remaining non-cancelable 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 1 to 19 years. The reserves for closed properties include management’s estimates for lease subsidies, lease terminations
and future payments on exited real estate. 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, existing economic conditions and when necessary utilizes local real estate brokers.
Adjustments to closed property reserves primarily relate to changes in estimated 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.
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% change in our closed
property reserves at September 26, 2010 would have affected net income by a maximum of approximately $3.5 million for
fiscal year 2010. Any reductions in reserves for closed properties established as part of the Wild Oats Markets acquisition
will be applied against goodwill and will not impact earnings.
Share-Based Payments
The Company maintains several share-based incentive plans. We grant both options to purchase common stock and restricted
common stock under our Whole Foods Market 2009 Stock Incentive Plan. All options outstanding are governed by the
original terms and conditions of the grants. Options are granted at an option price equal to the market value of the stock at
the grant date and generally vest ratably over a four- or nine-year period beginning one year from grant date and have a five,
seven, or ten year term. The grant date is established once the Company’s Board of Directors approves the grant and all key
terms have been determined. The exercise prices of our stock option grants are the closing price on the grant date. Stock
option grant terms and conditions are communicated to team members within a relatively short period of time. Our Company
generally approves one primary stock option grant annually, occurring during a trading window. Restricted common stock is
granted at the market price of the stock on the day of grant and generally vests over a three-month period.
The Company uses the Black-Scholes multiple option pricing model which requires extensive use of accounting judgment
and financial estimates, including estimates of the expected term team members will retain their vested stock options before
exercising them, the estimated volatility of the Company’s common stock price over the expected term, and the number of
options that will be forfeited prior to the completion of their vesting requirements. The related share-based payment expense
is recognized on a straight-line basis over the vesting period. The tax savings resulting from tax deductions in excess of
expense reflected in the Company’s financial statements are reflected as a financing cash flow. Application of alternative
assumptions could produce significantly different estimates of the fair value of share-based payment expense and
consequently, the related amounts recognized in the Consolidated Statements of Operations.
All full-time team members with a minimum of 400 hours of service may purchase our common stock through payroll
deductions under the Company’s Team Member Stock Purchase Plan (“TMSPP”). The TMSPP provides for a 5% discount
on the shares purchase date market value which meets the share-based payment, “Safe Harbor” provisions, and therefore is
non-compensatory. As a result, no compensation expense will be recognized for our employee stock purchase plan.
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%.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions
we use to determine share-based payment expense. However, if actual results are not consistent with our estimates or
assumptions, we may be exposed to changes in share-based payment expense that could be material.