Kroger 2014 Annual Report Download - page 86

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A-21
We have made and disclosed this estimate not because, except as noted above, this underfunding is a
direct liability of ours. Rather, we believe the underfunding is likely to have important consequences. In 2015,
we expect to contribute approximately $250 million to multi-employer pension plans, subject to collective
bargaining and capital market conditions. We expect increases in expense as a result of increases in multi-
employer pension plan contributions over the next few years. Finally, underfunding means that, in the event
we were to exit certain markets or otherwise cease making contributions to these funds, we could trigger a
substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable
that a liability exists and can be reasonably estimated, in accordance with GAAP.
The amount of underfunding described above is an estimate and could change based on contract
negotiations, returns on the assets held in the multi-employer plans and benefit payments. The amount could
decline, and our future expense would be favorably affected, if the values of the assets held in the trust
significantly increase or if further changes occur through collective bargaining, trustee action or favorable
legislation. On the other hand, our share of the underfunding could increase and our future expense could
be adversely affected if the asset values decline, if employers currently contributing to these funds cease
participation or if changes occur through collective bargaining, trustee action or adverse legislation. We
continue to evaluate our potential exposure to under-funded multi-employer pension plans. Although these
liabilities are not a direct obligation or liability of ours, any commitments to fund certain multi-employer plans
will be expensed when our commitment is probable and an estimate can be made.
See Note 16 to the Consolidated Financial Statements for more information relating to our participation
in these multi-employer pension plans.
Uncertain Tax Positions
We review the tax positions taken or expected to be taken on tax returns to determine whether and
to what extent a benefit can be recognized in our Consolidated Financial Statements. Refer to Note 5 to the
Consolidated Financial Statements for the amount of unrecognized tax benefits and other disclosures related
to uncertain tax positions.
Various taxing authorities periodically audit our income tax returns. These audits include questions
regarding our tax filing positions, including the timing and amount of deductions and the allocation of income
to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions,
including state and local taxes, we record allowances for probable exposures. A number of years may elapse
before a particular matter, for which an allowance has been established, is audited and fully resolved. As of
January 31, 2015, the Internal Revenue Service had concluded its examination of our 2008 and 2009 federal
tax returns. Tax years 2010 through 2013 remain under examination.
The assessment of our tax position relies on the judgment of management to estimate the exposures
associated with our various filing positions.
Share-Based Compensation Expense
We account for stock options under the fair value recognition provisions of GAAP. Under this method,
we recognize compensation expense for all share-based payments granted. We recognize share-based
compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. In
addition, we record expense for restricted stock awards in an amount equal to the fair market value of the
underlying stock on the grant date of the award, over the period the award restrictions lapse.
Inventories
Inventories are stated at the lower of cost (principally on a LIFO basis) or market. In total, approximately
95% of inventories in 2014 and 2013 were valued using the LIFO method. Cost for the balance of the inventories,
including substantially all fuel inventories, was determined using the FIFO method. Replacement cost was
higher than the carrying amount by $1.2 billion at January 31, 2015 and February 1, 2014. We follow the
Link-Chain, Dollar-Value LIFO method for purposes of calculating our LIFO charge or credit.