Albertsons 2011 Annual Report Download - page 45

The Company evaluates inventory shortages throughout each fiscal year based on actual physical counts in its
facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for
estimated shortages as of the end of each fiscal year.
Reserves for Closed Properties
The Company maintains reserves for costs associated with closures of retail stores, distribution centers 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, reduced by estimated subtenant rentals that could be reasonably obtained
for the property. The closed property lease liabilities usually are paid over the remaining lease terms, which
generally range from one to 20 years. 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.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is based on the estimated useful lives of the
assets using the straight-line method. Estimated useful lives generally are 10 to 40 years for buildings and
major improvements, three to 10 years for equipment, and the shorter of the term of the lease or expected life
for leasehold improvements and capitalized lease assets. Interest on property under construction of $8, $6 and
$14 was capitalized in fiscal 2011, 2010 and 2009, respectively.
Goodwill and Intangible Assets
The Company reviews goodwill for impairment during the fourth quarter of each year, and also if an event
occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below
its carrying amount. The reviews consist of comparing estimated fair value to the carrying value at the
reporting unit level. The Company’s reporting units are the operating segments of the business which consist
of traditional retail stores, hard-discount stores and supply chain services. Fair values are determined by using
both the market approach, applying a multiple of earnings based on guideline publicly traded companies, and
the income approach, discounting projected future cash flows based on management’s expectations of the
current and future operating environment. The rates used to discount projected future cash flows reflect a
weighted average cost of capital based on the Company’s industry, capital structure and risk premiums
including those reflected in the current market capitalization. If management identifies the potential for
impairment of goodwill, the fair value of the implied goodwill is calculated as the difference between the fair
value of the reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. An
impairment charge is recorded for any excess of the carrying value over the implied fair value.
The Company also reviews intangible assets with indefinite useful lives, which primarily consist of trademarks
and tradenames, for impairment during the fourth quarter of each year, and also if events or changes in
circumstances indicate that the asset might be impaired. The reviews consist of comparing estimated fair value
to the carrying value. Fair values of the Company’s trademarks and tradenames are determined primarily by
discounting an assumed royalty value applied to projected future revenues associated with the tradename based
on management’s expectations of the current and future operating environment. The royalty cash flows are
then discounted using rates based on the weighted average cost of capital discussed above and the specific risk
profile of the tradenames relative to the Company’s other assets.
Impairment of Long-Lived Assets
The Company monitors the recoverability of its long-lived assets whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable, including current period losses combined with a
history of losses or a projection of continuing losses, a significant decrease in the market value of an asset or
the Company’s plans for store closures. When such events or changes in circumstances occur, a recoverability
test is performed by comparing projected undiscounted future cash flows to the carrying value of the group of
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