Harris Teeter 2009 Annual Report Download - page 27

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Off Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have,
a current or future material effect on the Company’s financial condition, results of operations or cash flows.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions about future events that affect the reported amounts
of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. Future events
and their effects cannot be determined with absolute certainty. Therefore, management’s determination of
estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in
the selection and application of assumptions based on various factors including historical experience, current
and expected economic conditions and other factors believed to be reasonable under the circumstances. Actual
results could differ from those estimates. The Company constantly reviews the relevant, significant factors and
makes adjustments where the facts and circumstances dictate.
Management has identified the following accounting policies as the most critical in the preparation of the
Company’s financial statements because they involve the most difficult, subjective or complex judgments about
the effect of matters that are inherently uncertain.
Vendor Rebates, Credits and Promotional Allowances
Consistent with standard practices in the retail industry, Harris Teeter receives allowances from vendors through
a variety of programs and arrangements. Given the highly promotional nature of the retail supermarket industry, the
allowances are generally intended to defray the costs of promotion, advertising and selling the vendor’s products.
Examples of such arrangements include, but are not limited to, promotional, markdown and rebate allowances;
cooperative advertising funds; volume allowances; store opening discounts and support; and slotting, stocking and
display allowances. The amount of such allowances may be determined on the basis of (1) a fixed dollar amount
negotiated with the vendor, (2) an amount per unit purchased or as a percentage of total purchases from the vendor, or
(3) amounts based on sales to the customer, number of stores, in-store displays or advertising. The proper recognition
and timing of accounting for these items are significant to the reporting of the results of operations of the Company.
The Company applies the authoritative guidance of the Securities and Exchange Commission’s Staff Accounting
Bulletin No. 104 (“SAB No. 104”) – Revenue Recognition, Subtopic 605-50 of the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”), and other authoritative guidance as appropriate. Under
SAB No. 104, revenue recognition requires, as a prerequisite, the completion of the earnings process and its realization
or assurance of realizability. Vendor rebates, credits and other promotional allowances that relate to Harris Teeter’s
buying and merchandising activities, including lump-sum payments associated with long-term contracts, are recorded
as a component of cost of sales as they are earned, the recognition of which is determined in accordance with the
underlying agreement with the vendor, the authoritative guidance and completion of the earning process. Portions of
vendor allowances that are refundable to the vendor, in whole or in part, by the nature of the provisions of the contract
are deferred from recognition until realization is reasonably assured.
Harris Teeter’s practices are in accordance with ASC topic 605-50 and are based on the premise that the
accounting for these vendor allowances should follow the economic substance of the underlying transactions, which
is evidenced by the agreement with the vendor as long as the allowance is distinguishable from the merchandise
purchase. Consistent with this premise, Harris Teeter recognizes allowances when the purpose for which the vendor
funds were intended and committed to be used has been fulfilled and a cost has been incurred by the retailer. Thus,
it is the Company’s policy to recognize the vendor allowance consistent with the timing of the recognition of the
expense that the allowance is intended to reimburse and to determine the accounting classification consistent with
the economic substance of the underlying transaction. Where the Company provides an identifiable benefit or
service to the vendor apart from the purchase of merchandise, that transaction is recorded separately. For example,
co-operative advertising allowances are accounted for as a reduction of advertising expense in the period in which
the advertising cost is incurred. If the advertising allowance exceeds the cost of advertising, then the excess is
recorded against the cost of sales in the period in which the related expense is recognized.