Whole Foods 2010 Annual Report Download - page 33

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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% change in our share-
based payment expense would have affected net income by approximately $1.4 million for fiscal year 2010.
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 Internal Revenue
Service (“IRS”) and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual
results could differ from these estimates.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement.
To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our
reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax
settlement would require use of our cash and would result in an increase in our effective income tax rate in the period of
resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of
resolution.
Disclaimer on Forward-Looking Statements
Except for the historical information contained herein, the matters discussed in this analysis are forward-looking statements
that involve risks and uncertainties, including but not limited to general business conditions, the timely development and
opening of new stores, the integration of acquired stores, the impact of competition and changes in government regulation.
For a discussion of these and other risks and uncertainties that may affect our business, see “Item 1A. Risk Factors.” The
Company does not undertake any obligation to update forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to interest rate changes and changes in market values of our investments and long-term debt. We do not use
financial instruments for trading or other speculative purposes. We are also exposed to foreign exchange fluctuations on our
foreign subsidiaries.
The analysis presented for each of our market risk sensitive instruments is based on a 10% change in interest or currency
exchange rates. These changes are hypothetical scenarios used to calibrate potential risk and do not represent our view of
future market changes. As the hypothetical figures discussed below indicate, changes in fair value based on the assumed
change in rates generally cannot be extrapolated because the relationship of the change in assumption to the change in fair
value may not be linear. The effect of a variation in a particular assumption is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in another, which may magnify or counteract the
sensitivities.
Interest Rate Risk
We seek to minimize the risks from interest rate fluctuations through ongoing evaluation of the composition of our
investments and long-term debt.
The Company holds money market fund investments that are classified as cash equivalents and restricted cash. We had cash
equivalent investments and restricted cash investments totaling approximately $25.8 million and $86.6 million, respectively,
at September 26, 2010. Cash equivalent investments and restricted cash investments totaled approximately $439.0 million
and $70.4 million, respectively, at September 27, 2009. These investments are generally short-term in nature, and therefore
changes in interest rates would not have a material impact on the valuation of these investments. During fiscal year 2010, a
hypothetical 10% increase or decrease in interest rates would have resulted in an increase or decrease in interest income
earned on these investments of approximately $0.1 million.