Kroger 2014 Annual Report Download - page 83

Download and view the complete annual report

Please find page 83 of the 2014 Kroger annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 142

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142

A-18
The factors that most significantly affect the impairment calculation are our estimates of future cash
flows. Our cash flow projections look several years into the future and include assumptions on variables such
as inflation, the economy and market competition. Application of alternative assumptions and definitions, such
as reviewing long-lived assets for impairment at a different level, could produce significantly different results.
Goodwill
Our goodwill totaled $2.3 billion as of January 31, 2015. We review goodwill for impairment in the fourth
quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our
operating divisions and variable interest entities (collectively, “reporting units”) that have goodwill balances.
Fair value is determined using a multiple of earnings, or discounted projected future cash flows, and we
compare fair value to the carrying value of a reporting unit for purposes of identifying potential impairment.
We base projected future cash flows on management’s knowledge of the current operating environment and
expectations for the future. If we identify potential for impairment, we measure the fair value of a reporting
unit against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied
fair value of the reporting unit’s goodwill. We recognize goodwill impairment for any excess of the carrying
value of the reporting unit’s goodwill over the implied fair value.
In 2014, goodwill increased $160 million due to our merger with Vitacost.com which closed on
August 18, 2014. In addition, goodwill increased $9 million in 2014 and $901 million in 2013 due to our merger
with Harris Teeter which closed on January 28, 2014. For additional information related to the allocation of the
purchase price for Vitacost.com and Harris Teeter, refer to Note 2 to the Consolidated Financial Statements.
The annual evaluation of goodwill performed for our other reporting units during the fourth quarter
of 2014, 2013 and 2012 did not result in impairment. Based on current and future expected cash flows, we
believe goodwill impairments are not reasonably likely. A 10% reduction in fair value of our reporting units
would not indicate a potential for impairment of our goodwill balance.
For additional information relating to our results of the goodwill impairment reviews performed during
2014, 2013 and 2012 see Note 3 to the Consolidated Financial Statements.
The impairment review requires the extensive use of management judgment and financial estimates.
Application of alternative estimates and assumptions, such as reviewing goodwill for impairment at a different
level, could produce significantly different results. The cash flow projections embedded in our goodwill
impairment reviews can be affected by several factors such as inflation, business valuations in the market, the
economy and market competition.
Store Closing Costs
We provide for closed store liabilities on the basis of the present value of the estimated remaining non-
cancellable lease payments after the closing date, net of estimated subtenant income. We estimate the net lease
liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed
stores. We usually pay closed store lease liabilities over the lease terms associated with the closed stores,
which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities
primarily relate to changes in subtenant income and actual exit costs differing from original estimates. We
make adjustments for changes in estimates in the period in which the change becomes known. We review
store closing liabilities quarterly to ensure that any accrued amount that is not a sufficient estimate of future
costs is adjusted to earnings in the proper period.
We estimate subtenant income, future cash flows and asset recovery values based on our experience and
knowledge of the market in which the closed store is located, our previous efforts to dispose of similar assets
and current economic conditions. The ultimate cost of the disposition of the leases and the related assets is
affected by current real estate markets, inflation rates and general economic conditions.