Albertsons 2015 Annual Report Download - page 45

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knowledge of the market in which the closed property is located and, when necessary, utilizes local real estate brokers to assist
in the valuation.
The expectations on timing of disposition and the estimated sales price or subtenant rentals associated with closed properties,
owned or leased, are impacted by variable factors including 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 of reserves for closed
properties and related impairment charges are adequate, it is possible that market and economic conditions in the real estate
market could cause changes in the Company’s assumptions and may require additional reserves and asset impairment charges
to be recorded.
The Company’s net reserve for closed properties was $34, net of estimated sublease recoveries of $22, as of February 28, 2015,
and $47, net of estimated sublease recoveries of $29, as of February 22, 2014.
Goodwill
Goodwill is tested at least annually for impairment and more frequently if events or changes in circumstances indicate that the
asset might be impaired. The impairment test is performed using a two-step process. In the first step, the fair value of each
reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less
than the carrying amount of the reporting unit, there is an indication that goodwill impairment exists and a second step is
completed in order to determine the amount of the goodwill impairment, if any, that should be recorded. In the second step, an
impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value
of that goodwill.
The Company’s determination of reporting units considers the quantitative and qualitative characteristics of aggregation of each
of the components within the Independent Business, Save-A-Lot and Retail Food operating segments. The significant
qualitative and economic characteristics used in determining our components to support their aggregation include types of
businesses and the manner in which the components operate, consideration of key impacts to net sales, cost of sales,
competitive risks and the extent to which components share assets and other resources. The Company’s reporting units are the
operating segments of the business, which consist of Independent Business, Save-A-Lot and Retail Food. Goodwill was
assigned to the reporting units as of the acquisition date, with no amounts being allocated between reporting units.
The Independent Business reporting unit is comprised of the aggregation of two geographic distribution areas, which are
organized based on region components: East and West. The Company’s hard discount stores reporting unit is comprised of two
components under one Save-A-Lot banner: Corporate stores and Licensee stores. The Company’s Retail Food reporting unit is
comprised of the aggregation of five traditional retail food store components under five banners: Cub Foods, Shoppers Food &
Pharmacy, Shop 'n Save, Farm Fresh and Hornbacher’s.
The fair values of the Company’s reporting units are determined by using both the market approach, applying a multiple of
earnings and revenue based on guidelines for 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.
Fair value calculations contain significant judgments and estimates related to each reporting unit’s projected weighted average
cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. When preparing these estimates,
management considers each reporting unit’s historical results, current operating trends and specific plans in place. These
estimates are impacted by variable factors, including inflation, the general health of the economy and market competition. The
Company has sufficient current and historical information available to support its judgments and estimates. However, if actual
results are not consistent with the Company’s estimates, future operating results may be materially impacted.
The Company performed its annual test of goodwill during the fourth quarter of fiscal 2015, utilizing discount rates ranging
between 10 percent and 13 percent to discount projected future cash flows for each reporting unit and perpetual growth rates
that ranged between 2 percent and 3 percent.
Management performed sensitivity analyses on the fair values resulting from the discounted cash flow analysis utilizing
alternate assumptions that reflect reasonably possible changes to future assumptions. Based upon the Company’s analysis of the
Independent Business, Save-A-Lot and Retail Food reporting units, a 100 basis point increase in the discount rate utilized in the
discounted cash flow analysis would not have resulted in any reporting unit failing step one of the impairment test.
Additionally, a 100 basis point decrease in the estimated perpetual sales growth rates utilized in the discounted cash flow
analysis would not have resulted in any reporting unit failing the first step of the impairment tests. The fair value of the