Kroger 2014 Annual Report Download - page 84

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We reduce owned stores held for disposal to their estimated net realizable value. We account for costs to
reduce the carrying values of property, equipment and leasehold improvements in accordance with our policy
on impairment of long-lived assets. We classify inventory write-downs in connection with store closings, if
any, in “Merchandise costs.” We expense costs to transfer inventory and equipment from closed stores as they
are incurred.
Post-Retirement Benefit Plans
We account for our defined benefit pension plans using the recognition and disclosure provisions of
GAAP, which require the recognition of the funded status of retirement plans on the Consolidated Balance
Sheet. We record, as a component of Accumulated Other Comprehensive Income (“AOCI”), actuarial gains or
losses, prior service costs or credits and transition obligations that have not yet been recognized.
The determination of our obligation and expense for Company-sponsored pension plans and other post-
retirement benefits is dependent upon our selection of assumptions used by actuaries in calculating those
amounts. Those assumptions are described in Note 15 to the Consolidated Financial Statements and include,
among others, the discount rate, the expected long-term rate of return on plan assets, mortality and the
rate of increases in compensation and health care costs. Actual results that differ from our assumptions are
accumulated and amortized over future periods and, therefore, generally affect our recognized expense and
recorded obligation in future periods. While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions, including the discount rate
used and the expected return on plan assets, may materially affect our pension and other post-retirement
obligations and our future expense. Note 15 to the Consolidated Financial Statements discusses the effect
of a 1% change in the assumed health care cost trend rate on other post-retirement benefit costs and the
related liability.
The objective of our discount rate assumptions was intended to reflect the rates at which the pension
benefits could be effectively settled. In making this determination, we take into account the timing and
amount of benefits that would be available under the plans. Our methodology for selecting the discount rates
was to match the plan’s cash flows to that of a hypothetical bond portfolio whose cash flow from coupons
and maturities match the plan’s projected benefit cash flows. The discount rates are the single rates that
produce the same present value of cash flows. The selection of the 3.87% and 3.74% discount rates as of year-
end 2014 for pension and other benefits, respectively, represents the hypothetical bond portfolio using bonds
with an AA or better rating constructed with the assistance of an outside consultant. We utilized a discount
rate of 4.99% and 4.68% as of year-end 2013 for pension and other benefits, respectively. A 100 basis point
increase in the discount rate would decrease the projected pension benefit obligation as of January 31, 2015,
by approximately $500 million.
To determine the expected rate of return on pension plan assets held by Kroger for 2014, we considered
current and forecasted plan asset allocations as well as historical and forecasted rates of return on various
asset categories. In 2014, we decreased our assumed pension plan investment return rate to 7.44%, compared
to 8.50% in 2013 and 2012. Our pension plan’s average rate of return was 7.58% for the 10 calendar years ended
December 31, 2014, net of all investment management fees and expenses. The value of all investments in our
Company-sponsored defined benefit pension plans during the calendar year ending December 31, 2014, net
of investment management fees and expenses, increased 5.65%. For the past 20 years, our average annual rate
of return has been 9.58%. Based on the above information and forward looking assumptions for investments
made in a manner consistent with our target allocations, we believe a 7.44% rate of return assumption is
reasonable for 2014. See Note 15 to the Consolidated Financial Statements for more information on the asset
allocations of pension plan assets.
On January 31, 2015, we adopted new mortality tables based on mortality experience and assumptions
for generational mortality improvement in calculating our 2014 year end pension obligation. The tables
assume an improvement in life expectancy and increase our benefit obligation and future expenses. We used
the RP-2000 projected 2021 mortality table in calculating our 2013 year end pension obligation and 2014, 2013
and 2012 pension expense.