Whole Foods 2012 Annual Report Download - page 39

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and self-insured liabilities at September 30, 2012 would have affected net income by approximately $7.1 million for fiscal year
2012.
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 month
to 17 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 30, 2012 would have affected net income by a maximum of approximately $2.5 million for fiscal
year 2012.
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-year 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 $2.6 million for fiscal year 2012.
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”)