Albertsons 2004 Annual Report Download - page 25

LIFO and Retail Inventory Method
For a significant portion of the company’s inventory, cost is determined through use of the last-in, first-out
(LIFO) method. The Company utilized LIFO to value approximately 68 percent and 71 percent of the company’s
consolidated inventories for fiscal 2004 and 2003, respectively.
The retail inventory method (RIM) is used to value retail inventory. The valuation of inventories are at cost
and the resulting gross margins are calculated by applying a calculated cost-to-retail ratio to the retail value of
inventories. RIM is an averaging method that has been widely used in the retail industry due to its practicality.
Inherent in the RIM calculations are certain significant management judgments and estimates, including
shrinkage, which significantly impact the ending inventory valuation at cost, as well as the resulting gross
margins. These judgments and estimates, coupled with the fact that the RIM is an averaging process, can, under
certain circumstances, produce results which differ from actual. Management believes that the company’s RIM
provides an inventory valuation which reasonably approximates cost and results in carrying inventory at the
lower of cost or market.
Allowances for Losses on Receivables
Management makes estimates of the uncollectibility of its accounts and notes receivable portfolios. In
determining the adequacy of the allowances, management analyzes the value of the collateral, customer financial
statements, historical collection experience, aging of receivables and other economic and industry factors.
Although risk management practices and methodologies are utilized to determine the adequacy of the allowance,
it is possible that the accuracy of the estimation process could be materially impacted by different judgments as
to collectibility based on the information considered and further deterioration of accounts.
Reserves for Closed Properties and Asset Impairment Charges
The company maintains reserves for estimated losses on retail stores, distribution warehouses and other
properties that are no longer being utilized in current operations. The company provides for closed property lease
liabilities using a discount rate to calculate the present value of the remaining noncancellable lease payments
after the closing date, net of estimated subtenant income. The closed property lease liabilities usually are paid
over the remaining lease terms, which generally range from one to 20 years. The company estimates subtenant
income and future cash flows based on the company’s experience and knowledge of the market in which the
closed property is located, the company’s previous efforts to dispose of similar assets and current economic
conditions.
Owned properties that are closed are reduced to their estimated net realizable value. Costs to reduce the
carrying values of property, equipment and leasehold improvements are accounted for in accordance with our
policy on impairment of long-lived assets. Impairment charges on long-lived assets are recognized when
expected net future cash flows are less than the assets’ carrying value. The company estimates net future cash
flows based on its experience and knowledge of the market in which the closed property is located and, when
necessary, utilizes local real estate brokers.
Adjustments to closed property reserves primarily relate to changes in 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. Closed property reserves are reviewed quarterly to ensure that any accrued amount that
is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is
adjusted to income in the proper period.
The expectations on timing of disposition or sublease and the estimated sales price or sublease income
associated with closed properties are impacted by variable factors such as inflation, the general health of the
economy, resultant demand for commercial property, the ability to secure subleases, the creditworthiness of
sublessees and the company’s success at negotiating early termination agreements with lessors. While
management believes the current estimates on closed properties are adequate, it is possible that continued
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