Whole Foods 2010 Annual Report Download - page 31

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September 27, 2009, respectively. Costs for remaining inventories are determined by the first-in, first-out (“FIFO”) method.
Cost is determined using the item cost method and the retail method for inventories. The item cost method involves counting
each item in inventory, assigning costs to each of these items based on the actual purchase cost (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. 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.
Our cost-to-retail ratios contain uncertainties because the calculation requires management to make assumptions and to apply
judgment regarding inventory mix, inventory spoilage and inventory shrink. Because of the significance of the judgments
and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or
if the underlying circumstances were to change. A 10% difference in our cost-to-retail ratios at September 26, 2010 would
have affected net income by approximately $1.3 million for fiscal year 2010.
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 at the beginning of the Company’s fourth
fiscal quarter, or more frequently if impairment indicators arise, on a reporting unit level. We allocate goodwill to one
reporting unit for goodwill impairment testing. We compare our fair value, which is determined utilizing both a market value
method and discounted projected future cash flows, 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. Because of the significance of the judgments and estimation processes, it is likely that
materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to
change.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
We evaluate long-lived assets for impairment whenever events or changes in circumstances, such as unplanned negative cash
flow or short lease life, indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to
be generated by the asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell. Application of alternative assumptions, such as changes in
estimate of future cash flows, could produce significantly different results. Because of the significance of the judgments and
estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the
underlying circumstances were to change.
Derivative Instruments
The Company utilizes derivative financial instruments to hedge its exposure to changes in interest rates. All derivative
financial instruments are recorded on the balance sheet at their respective fair value. The Company does not use financial
instruments or derivatives for any trading or other speculative purposes.
During fiscal year 2008, the Company entered into a three-year interest rate swap agreement with a notional amount of $490
million to effectively fix the interest rate on $490 million of the term loan at 4.718%, excluding the applicable margin and
associated fees. The interest rate swap was designated as a cash flow hedge. Hedge effectiveness is measured by comparing
the change in fair value of the hedge item with the change in fair value of the derivative instrument. The effective portion of
the gain or loss of the hedge is recorded on the Consolidated Balance Sheets under the caption “Accumulated other
comprehensive income (loss).” Any ineffective portion of the hedge, as well as amounts not included in the assessment of
effectiveness, is recorded on the accompanying Consolidated Statements of Operations under the caption “Interest expense.”
Subsequent to year-end, the swap agreement expired and the carrying amount was paid.
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.