Sprouts Farmers Market 2014 Annual Report Download - page 84

Operating Leases
The Company leases stores, warehouse facilities and administrative offices under operating leases.
Incentives received from lessors are deferred and recorded as a reduction of rental expense over the
lease term using the straight-line method. The current portion of unamortized lease incentives is included
in Other accrued liabilities and the noncurrent portion is included in Other long-term liabilities in the
accompanying consolidated balance sheets.
Store lease agreements generally include rent abatements and rent escalation provisions and may
include contingent rent provisions based on a percentage of sales in excess of specified levels. The
Company recognizes escalations of minimum rents and/or abatements as deferred rent and amortizes
these balances on a straight-line basis over the term of the lease.
For lease agreements that require the payment of contingent rents based on a percentage of sales
above stipulated minimums, the Company begins accruing an estimate for contingent rent when it is
determined that it is probable the specified levels of sales in excess of the stipulated minimums will be
reached during the year. The Company accrued $1.6 million, $1.4 million and $0.9 million for the years
ended December 28, 2014, December 29, 2013 and December 30, 2012, respectively for contingent rent.
Financing Lease Obligations
The Company has recorded financing lease obligations for 38 store building leases at both
December 28, 2014 and December 29, 2013. In each case, the Company was deemed to be the owner
during the construction period under lease accounting guidance. Further, each lease contains provisions
indicating continuing involvement with the property at the end of the construction period, which include
either an affiliate guaranty or contingent collateral. As a result, in accordance with applicable accounting
guidance, buildings and related assets subject to the leases are reflected on the Company’s balance
sheets and depreciated over their remaining useful lives. The present value of the lease payments
associated with these buildings is recorded as financing lease obligations.
At December 28, 2014 the Company has also recorded a current financing lease obligation and
related construction in progress totaling $25.0 million for one of its administrative facilities under the lease
accounting guidance noted above. However, the Company expects that there will be no continuing
involvement provisions in effect at the end of the construction period and therefore will be able to remove
the asset and corresponding financing lease obligation at the end of the construction period in the first
quarter of fiscal 2015.
Monthly lease payments are allocated between the land element of the lease (which is accounted for
as an operating lease) and the financing obligation. The financing obligation is amortized using the
effective interest method and the interest rate is determined in accordance with the requirements of sale-
leaseback accounting. Lease payments less the portion allocated to the land element of the lease and that
portion considered to be interest expense decrease the financing liability. At the end of the initial lease
term, should the Company decide not to renew the lease, the net book value of the asset and the
corresponding financing obligation would be reversed.
The outflows from the construction of the buildings are classified as investing activities, and the
outflows associated with the financing obligations principal payments and inflows from the associated
financing proceeds are classified as financing activities in the accompanying consolidated statements of
cash flows.
81