Harris Teeter 2007 Annual Report Download - page 26

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The proper valuation of inventory also requires management to estimate the net realizable value of the
Company’s obsolete and slow-moving inventory at the end of each period. Management bases its net realizable
values upon many factors including historical recovery rates, the aging of inventories on hand, the inventory
movement of specific products and the current economic conditions. When management has determined inventory
to be obsolete or slow moving, the inventory is reduced to its net realizable value by recording an obsolescence
reserve. Given the Company’s experiences in selling obsolete and slow-moving inventory, management believes
that the amounts of the obsolescence reserves to the carrying values of its inventories are materially adequate.
With regard to the proper valuations of inventories, management reviews its judgments, assumptions and
other relevant, significant factors on a routine basis and makes adjustments where the facts and circumstances
dictate.
Self-insurance Reserves for Workers’ Compensation, Healthcare and General Liability
The Company is primarily self-insured for most U.S. workers’ compensation claims, healthcare claims and
general liability and automotive liability losses. The Company has purchased insurance coverages in order to
establish certain limits to its exposure on a per claim basis.
Actual U.S. workers’ compensation claims, and general liability and automotive liability losses, are
reported to the Company by third party administrators. The third party administrators also report initial
estimates of related loss reserves. The open claims and initial loss reserves are subjected to examination by the
Company’s risk management and accounting management utilizing a consistent methodology which involves
various assumptions, judgment and other factors. Such factors include but are not limited to the probability
of settlement, the amount at which settlement can be achieved, the probable duration of the claim, the cost
development pattern of the claim and the applicable cost development factor. The Company determines the
estimated reserve required for U.S. worker compensation claims in each accounting period. This requires that
management determine estimates of the costs of claims incurred and accrue for such expenses in the period
in which the claims are incurred. Management estimates the ultimate cost for claims incurred based on actual
claims, reviewed for the status and probabilities associated with potential settlement and then adjusts them by
development factors from published insurance industry sources. In fiscal 2005, the Company began measuring
the liabilities associated with claims for workers’ compensation, general liability and automotive liability at
Harris Teeter through the use of actuarial methods to project an estimate of ultimate cost for claims incurred.
The estimated cost for claims incurred are discounted to present values using a discount rate representing a
return on high-quality fixed income securities with an average maturity equal to the average payout of the related
liability. Harris Teeter liabilities represent approximately 94% of the total Company self-insurance reserves for
workers compensation, general liability and automotive liability claims. The Company constantly reviews the
relevant, significant factors and makes adjustments where the facts and circumstances dictate. Management
does not believe the likelihood is significant that existing worker compensation claims, general liability claims
and automotive liability claims will be settled for materially higher amounts than those accrued.
The variety of healthcare plans available to employees are primarily self-insured, although some locations
have insured health maintenance organization plans. The Company records an accrual for the estimated amount of
self-insured healthcare claims incurred by all participants but not yet reported (IBNR) by applying a development
factor to the reported claims amount. The most significant factors which impact on the determination of the
required accrual are the historical pattern of the timeliness of claims processing, changes in the nature or types
of benefit plans, changes in the plan benefit designs, employer-employee cost sharing factors, and medical
trends and inflation. These reserves are recorded based on historical experience and industry trends, which are
continually monitored, and accruals are adjusted when warranted by changes in facts and circumstances. The
Company believes that the total healthcare cost accruals are reasonable and adequate to cover future payments
on pre-existing claims.