Sprouts Farmers Market 2014 Annual Report Download - page 68

The Company’s non-perishable inventory is valued at the lower of cost or market using weighted
averaging and other estimation techniques, the use of which approximates the FIFO method.
Physical inventory counts for non-perishable inventories are performed in our stores during each fiscal
quarter end by a third-party inventory counting service. As inventory is adjusted at each period end for the
physical inventory results, we believe that all inventories are saleable and no allowances or reserves for
shrinkage or obsolescence were recorded as of December 28, 2014, December 29, 2013 and
December 30, 2012.
Lease Assumptions
The most significant estimates used by management in accounting for leases and the impact of those
estimates are as follows:
Expected lease term—Our expected lease term includes both contractual lease periods and
cancelable option periods where failure to exercise such options would result in an economic penalty. The
expected lease term is used in determining whether the lease is accounted for as an operating lease or a
capital lease. The expected lease term is also used in determining the useful life of the related assets. An
increase in the expected lease term will increase the probability that a lease will be considered a capital
lease and will generally result in higher interest and depreciation expense for a leased property recorded
on our balance sheets.
Incremental borrowing rate—The incremental borrowing rate is primarily used in determining whether
the lease is accounted for as an operating lease or a capital lease. An increase in the incremental
borrowing rate decreases the net present value of the minimum lease payments and reduces the
probability that a lease will be considered a capital lease. For leases which are recorded on our balance
sheets with a related capital lease, the incremental borrowing rate is also used in allocating our rental
payments between interest expense and a reduction of the outstanding obligation.
Fair market value of the leased asset—The fair market value of leased retail property is generally
estimated based on comparable market data provided by third-party sources and evaluated using the
experience of our development staff. Fair market value is used in determining whether the lease is
accounted for as an operating lease or a capital lease.
Accounting owner—With certain leases, we are involved in the construction of the building (or certain
significant changes to an existing building) and we are considered owner of the building for accounting
purposes. We capitalize the amount of the total project costs incurred during the construction period. At the
completion of the construction project, we evaluate whether the transfer to the landlord meets the
requirements for sale-leaseback accounting treatment. A sale and leaseback of the asset is deemed to
occur when construction of the asset is complete and the lease term begins and the relevant sale-
leaseback accounting criteria are met. If we do not pass the criteria for sale-leaseback accounting, we
record a financing lease asset, which is included with “Buildings” and a corresponding financing obligation
in “Capital and financing lease obligations” in our Consolidated Balance Sheets. We allocate each lease
payment between a reduction of the lease obligation and interest expense using the effective interest
method.
Goodwill and Intangible Assets
Goodwill represents the cost of acquired businesses in excess of the fair value of assets and liabilities
acquired. Our indefinite-lived intangible assets consist of trade names related to “Sprouts Farmers Market”
and liquor licenses. We also hold intangible assets with finite useful lives, consisting of favorable and
unfavorable leasehold interests and the “Sunflower Farmers Market” trade name.
Goodwill and indefinite-lived intangible assets are evaluated for impairment on an annual basis during
the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that the asset
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