Whole Foods 2007 Annual Report Download - page 40

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Insurance and Self-Insurance Liabilities
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’
compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee
health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by
considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. While we
believe that our assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if
future occurrences and claims differ from these assumptions and historical trends.
Reserves for Closed Properties
The Company maintains reserves for estimated losses on retail stores, distribution warehouses and other properties that are
no longer being utilized in current operations. The Company provides for closed property operating lease liabilities using a
discount rate to calculate the present value of the remaining noncancelable lease payments after the closing date, net of
estimated subtenant income. The closed property lease liabilities usually are paid over the remaining lease terms, which
generally range from one to 17 years. The Company estimates subtenant income and future cash flows based on the
Company’s experience and knowledge of the market in which the closed property is located, the Company’s previous efforts
to dispose of similar assets and existing economic conditions.
Capital lease properties that are closed are reduced to their estimated fair value. Reduction in the carrying values of property,
equipment and leasehold improvements are recognized when expected net future cash flows are less than the assets’ carrying
value. The Company estimates net future cash flows based on its experience and knowledge of the market in which the
closed property is located and, when necessary, utilizes local real estate brokers.
Adjustments to closed property reserves primarily relate to changes in subtenant income or actual exit costs differing from
original estimates. Adjustments are made for changes in estimates in the period in which the changes become known.
Inventory Valuation
We value our inventories at the lower of cost or market. Cost was determined using the last-in, first-out (“LIFO”) method for
approximately 81.7% and 93.9% of inventories in fiscal years 2007 and 2006, respectively. Under the LIFO method, the cost
assigned to items sold is based on the cost of the most recent items purchased. As a result, the costs of the first items
purchased remain in inventory and are used to value ending inventory. The excess of estimated current costs over LIFO
carrying value, or LIFO reserve, was approximately $20.0 million and $13.2 million at September 30, 2007 and September
24, 2006, respectively. Costs for remaining inventories are determined by the first-in, first-out (“FIFO”) method. Cost was
determined using the retail method and the item cost method for inventories in fiscal years 2007 and 2006. Under the retail
method, the valuation of inventories at cost and the resulting gross margins are determined by counting each item in
inventory, then applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent
in the retail inventory method calculations are certain management judgments and estimates which could impact the ending
inventory valuation at cost as well as the resulting gross margins. The item cost method involves counting each item in
inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances) of each item
and recording the actual cost of items sold. The item-cost method of accounting enables management to more precisely
manage inventory and purchasing levels when compared to the retail method of accounting.
Goodwill and Intangible Assets
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed. Goodwill is reviewed for impairment annually, or more frequently if impairment indicators
arise, on a reporting unit level. We allocate goodwill to one reporting unit for goodwill impairment testing. We determine
fair value utilizing both a market value method and discounted projected future cash flows compared to our carrying value
for the purpose of identifying impairment. Our annual impairment review requires extensive use of accounting judgment and
financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a
different organizational level, could produce significantly different results.
Income Taxes
We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to
differences between the book basis and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
reverse. Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period that includes the
enactment date. Significant accounting judgment is required in determining the provision for income taxes and related
accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where
the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the IRS and other