Albertsons 2008 Annual Report Download - page 31

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Significant accounting policies are discussed in Note 1 – The Company and Summary of Significant Accounting
Policies in the Notes to Consolidated Financial Statements. Management believes the following critical
accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of the
Company’s consolidated financial statements.
Vendor Funds
The Company receives funds from many of the vendors whose products the Company buys for resale in its
stores. These vendor funds are provided to increase the sell-through of the related products. The Company
receives vendor funds for a variety of merchandising activities: placement of the vendors’ products in the
Company’s advertising; display of the vendors’ products in prominent locations in the Company’s stores;
supporting the introduction of new products into the Company’s retail stores and distribution system; exclusivity
rights in certain categories; and to compensate for temporary price reductions offered to customers on products
held for sale at retail stores. The Company also receives vendor funds for buying activities such as volume
commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early
payment of merchandise purchases. The majority of the vendor fund contracts have terms of less than a year,
with a small proportion of the contracts longer than one year.
The Company recognizes vendor funds for merchandising activities as a reduction of Cost of sales when the
related products are sold in accordance with Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting
by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.”
Vendor funds that have been earned as a result of completing the required performance under the terms of the
underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory.
The amount and timing of recognition of vendor funds as well as the amount of vendor funds remaining in
ending inventory requires management judgment and estimates. Management determines these amounts based on
estimates of current year purchase volume using forecast and historical data and review of average inventory
turnover data. These judgments and estimates impact the Company’s reported operating earnings and inventory
amounts. The historical estimates of the Company have been reliable in the past, and the Company believes the
methodology will continue to be reliable in the future. Based on previous experience, the Company does not
expect there will be a significant change in the level of vendor support. However, if such a change were to occur,
cost of sales and advertising expense could change, depending on the specific vendors involved. If vendor
advertising allowances were substantially reduced or eliminated, the Company would consider changing the
volume, type and frequency of the advertising, which could increase or decrease its advertising expense.
Similarly, the Company is not able to assess the impact of vendor advertising allowances on creating additional
revenues as such allowances do not directly generate revenue for the Company’s stores. For fiscal 2008, a 100
basis point change in total vendor funds earned, including advertising allowances, with no offsetting changes to
the base price on the products purchased, would impact gross profit by 10 basis points.
Inventories
Inventories are valued at the lower of cost or market. Substantially all of the Company’s inventory consists of
finished goods.
Approximately 82 percent of the Company’s inventories are valued using the last-in, first-out (“LIFO”) method
for both fiscal 2008 and 2007. The Company uses a combination of the retail inventory method (“RIM”) and
replacement cost method to determine the current cost of its inventory before any LIFO reserve is applied. Under
RIM, the current cost of inventories and the gross margins are calculated by applying a cost-to-retail ratio to the
current retail value of inventories. Under the replacement cost method, the most current unit purchase cost is
used to calculate the current cost of inventories. The first-in, first-out method (“FIFO”) is used to determine cost
for some of the remaining highly perishable inventories. If the FIFO method had been used to determine cost of
inventories for which the LIFO method is used, the Company’s inventories would have been higher by
approximately $180 and $178 at February 23, 2008 and February 24, 2007, respectively.
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