Harris Teeter 2011 Annual Report Download - page 35

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Insurance
The Company utilizes a combination of self-insured retention and high-deductible programs 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. The Company determines the estimated reserve required
for worker compensation claims, general liability and automotive liability by first analyzing the costs of claims incurred and
then adjusts such estimates through actuarial methods to project the ultimate cost for claims incurred. The estimated total
expected costs of claims includes an estimate for claims incurred but not reported (IBNR) and is 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 records an accrual for the estimated amount of self-insured healthcare IBNR claims. These reserves are
recorded based on historical experience, which is continually monitored, and accruals are adjusted when warranted by changes
in facts and circumstances.
Deferred Rent
The Company recognizes rent holidays, including the period of time the Company has access prior to the store opening,
which typically includes construction and fixturing activity, and rent escalations on a straight-line basis over the term of the
lease. The deferred rent amount is included in Other Long-Term Liabilities on the Company’s Consolidated Balance Sheets.
The Company expenses construction period rent as incurred.
Derivatives
The Company utilizes derivative financial instruments to hedge its exposure to changes in interest rates. All derivative
financial instruments are recorded on the balance sheet at their respective fair value. The Company does not use financial
instruments or derivatives for any trading or other speculative purposes.
Derivatives are required to be carried at fair value on the balance sheet and receives hedge accounting treatment when
certain conditions are met. In accordance with this standard, the Company’s derivative financial instruments are recognized on
the balance sheet at fair value. Changes in the fair value of derivative instruments designated as “cash flow” hedges, to the extent
the hedges are highly effective, are recorded in other comprehensive income, net of tax effects. Ineffective portions of cash flow
hedges, if any, are recognized in current period earnings. Other comprehensive income or loss is reclassified into current period
earnings when the hedged transaction affects earnings.
The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging
instruments are highly effective in offsetting the changes in the cash flow of the hedge items. If it is determined that a derivative
is not highly effective as a hedge or ceases to be highly effective, the Company will discontinue hedge accounting prospectively.
Harris Teeter enters into purchase commitments for a portion of the fuel utilized in its distribution operations. Harris Teeter
expects to take delivery of and to utilize these resources in a reasonable period of time and in the conduct of normal business.
Accordingly, these fuel purchase commitments qualify as normal purchases. Harris Teeter also utilizes derivative financial
instruments to hedge its exposure in the price variations of fuel. In addition, from time to time Harris Teeter will enter into
commodity forward contracts related to the purchase of ingredients used in production processes. These contracts generally
qualify for the normal purchase exception under guidance for derivative instruments and hedging activity.
By entering into derivative instrument contracts, the Company exposes itself, from time to time, to counterparty credit risk.
Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair
value of a derivative contract is in an asset position, the counterparty has a liability to the Company, which creates credit risk
for the Company. The Company attempts to minimize this risk by selecting counterparties with investment grade credit ratings,
limiting its exposure to any single counterparty and regularly monitoring its market position with each counterparty.
The Company’s derivative instruments do not contain any credit-risk related contingent features.
RUDDICK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
31