Whole Foods 2011 Annual Report Download - page 34

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from six months to 18 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 25, 2011 would have affected net income by a maximum of approximately $2.8 million for
fiscal year 2011. 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.
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.
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 share-
based payment expense would have affected net income by approximately $1.7 million for fiscal year 2011.
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 Internal Revenue
Service (“IRS”) and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual
results could differ from these estimates.
The Company recognizes 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.