Sprouts Farmers Market 2015 Annual Report Download - page 77

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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.
Fair Value Measurements
The Company records its financial assets and liabilities in accordance with the framework for
measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that
prioritizes the inputs used to measure fair value:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the
impairment analysis of goodwill, intangible assets, and long-lived assets and in the valuation of store
closure and exit costs.
The determination of fair values of certain tangible and intangible assets for purposes of our
goodwill impairment evaluation as described above is based upon Level 3 inputs. Closed store reserves
are recorded at net present value to approximate fair value which is classified as Level 3 in the hierarchy.
The estimated fair value of the closed store reserve is calculated based on the present value of the
remaining lease payments and other charges using a weighted average cost of capital, reduced by
estimated sublease rentals. The weighted average cost of capital is estimated using information from
comparable companies and management’s judgment related to the risk associated with the operations of
the stores.
Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets,
accounts payable, accrued salaries and benefits and other accrued liabilities approximate fair value
because of the short maturity of those instruments. Based on comparable open market transactions, the
fair value of the long-term debt approximated carrying value as of January 3, 2016. Based on comparable
open market transactions of the Former Term Loan (as defined in Note 12), the fair value of the long-term
debt, including current maturities, approximated carrying value as of December 28, 2014. The Company’s
estimates of the fair value of long-term debt (including current maturities) were classified as Level 2 in the
fair value hierarchy.
Equity-Based Compensation
The Company measures equity-based compensation cost at the grant date based on the fair value
of the award and recognizes equity-based compensation cost as expense over the vesting period. As
equity-based compensation expense recognized in the consolidated statements of operations is based on
awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures
and trued up for actual forfeitures. The Company’s forfeiture rate is estimated based on an analysis of our
actual forfeitures of grants made under our 2011 Option Plan and 2013 Incentive Plan. The actual
forfeiture rate could differ from these estimates. The Company uses the Black-Scholes option-pricing
model to determine the grant date fair value for each option grant. The Black-Scholes option-pricing
model requires extensive use of subjective assumptions. See Note 22, “Equity-Based Compensation” for