Whole Foods 2014 Annual Report Download - page 31

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Goodwill and Intangible Assets
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed. Goodwill is reviewed for impairment annually at the Company’s fiscal year end, or more
frequently if impairment indicators arise, on a reporting unit level. We allocate goodwill to one reporting unit for goodwill
impairment testing. A qualitative assessment, based on macroeconomic factors, industry and market conditions and company-
specific performance, is performed to determine whether it is more likely than not that the fair value of the reporting unit is
impaired. If it is more likely than not, we compare our fair value, which is determined utilizing both a market value method and
discounted projected future cash flows, to our carrying value for the purpose of identifying impairment. Our annual impairment
review requires extensive use of accounting judgment and financial estimates. Application of alternative assumptions and
definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different
results. Because of the significance of the judgments and estimation processes, it is possible that materially different amounts
could be recorded if we used different assumptions or if the underlying circumstances were to change.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances, such as unplanned
negative cash flow, short lease life, or a plan to close is established, indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted cash flows expected to be generated by the asset. If such assets are determined to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The
fair value, based on hierarchy input Level 3, is determined using management’s best estimate based on a discounted cash flow
model based on future store operating results using internal projections or based on a review of the future benefit the Company
anticipates receiving from the related assets. Additionally for closing locations, the Company estimates net future cash flows
based on its experience and knowledge of the area in which the closed property is located and, when necessary, utilizes local
real estate brokers. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Application of alternative assumptions, such as changes in estimates of future cash flows, could produce significantly different
results. 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.
Insurance and Self-Insurance Liabilities
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. While we believe that our
assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and
claims differ from these assumptions and historical trends.
We have not made any 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 28, 2014 would have affected net income by approximately $9 million for fiscal year
2014.
Leases
The Company generally leases stores, non-retail facilities and administrative offices under operating leases. Store lease
agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for percentage of sales in
excess of specified levels. We recognize rent on a straight-line basis over the expected term of the lease, which includes rent
holiday periods and scheduled rent increases. The expected lease term begins with the date the Company has the right to possess
the leased space for construction and other purposes. The expected lease term may also include the exercise of renewal options
if the exercise of the option is determined to be reasonably assured. The expected lease term is also used in the determination
of whether a store is a capital or operating lease. Amortization of land and building under capital lease is included with occupancy
costs, while the amortization of equipment under capital lease is included with depreciation expense. Additionally, we review
leases for which we are involved in construction to determine whether build-to-suit and sale-leaseback criteria are met. For those
leases that trigger specific build-to-suit accounting, developer assets are recorded during the construction period with an offsetting
liability. Sale-leaseback transactions are recorded as financing lease obligations. We record tenant improvement allowances and
rent holidays as deferred rent liabilities, and amortize the deferred rent over the expected lease term to rent. We record rent