Harris Teeter 2011 Annual Report Download - page 21

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 workers’ compensation claims, healthcare claims and general liability and
automotive liability losses. The Company has purchased insurance coverage in order to establish certain limits to its exposure
on a per claim basis.
Actual 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 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. The Company
measures the liabilities associated with claims for workers’ compensation, general liability and automotive liability 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. 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. The Company records an accrual for the
estimated amount of self-insured healthcare claims incurred by all participants but not yet reported (IBNR) using an actuarial
method of 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. Historical experience is 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.
Impairment of Long-lived Assets and Closed Store Obligations
The Company assesses its long-lived assets for possible impairment whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to
the net non-discounted cash flows expected to be generated by the asset. An impairment loss is recognized for any excess of
net book value over the estimated fair value of the asset impaired. The fair value is estimated based on expected future cash flows.
The value of property and equipment associated with closed stores and facilities is adjusted to reflect recoverable values
based on the Company’s prior history of disposing of similar assets and current economic conditions. Management continually
reviews its fair value estimates and records impairment charges for assets held for sale when management determines, based
on new information which it believes to be reliable, that such charges are appropriate.
The results of impairment tests are subject to management’s estimates and assumptions of projected cash flows and
operating results. The Company believes that, based on current estimates and assumptions of projected cash flows, materially
different reported results are not likely to result from long-lived asset impairments. However, a change in assumptions or market
conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results.
The Company records liabilities for closed stores that are under long-term lease agreements. The liability represents an
estimate of the present value of the remaining non-cancelable lease payments after the anticipated closing date, net of estimated
subtenant income. The closed store liabilities usually are paid over the lease terms associated with the closed stores, unless settled
earlier. Harris Teeter management estimates the subtenant income and future cash flows based on its historical experience and
knowledge of (1) the market in which the store is located, (2) the results of its previous efforts to dispose of similar assets and
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