Operating and Financial Review and Prospects
Critical accounting policies
Vendor allowances
40
Ahold Annual Report 2003
Operating and Financial Review and Prospects
the profitability of certain accounts, or, if such
improvements cannot be achieved, to terminate
those accounts. Second, USF is investing in
human resources, training, marketing and other
efforts to increase its share of "street" customers
on a market-by-market basis. Street customers are
typically independent, owner-operated restaurants,
schools and other customers whose relationships
are managed by USF's "street-based" group of
sales representatives.
Improved private label and product mix. USF
intends to apply its category management process
to increase its private label penetration in targeted
product categories. USF is also applying this
process to evaluate opportunities for shifting the
mix of both branded and private label products
to more value-added items.
Improved distribution efficiencies. USF is
evaluating opportunities for longer term gains
in distribution efficiencies through investment
in technology and facilities.
Reinforcing accountability, controls and
Corporate Governance
We are in the process of replacing a decentralized system
of internal controls with a one-company system with
central reporting lines. We already announced that internal
audit will not only report to the Chief Executive Officer, but
also to the Audit Committee of the Supervisory Board.
Additionally, we have established the position of Chief
Corporate Governance Counsel on the Corporate Executive
Board. The Chief Corporate Governance Counsel will serve
as the driving force behind improving internal governance
policies and practices, legal compliance and adherence to
ethical and social standards.
Effective April 19, 2004, we have formed a
Corporate Business Controlling Organization and we
have strengthened the Corporate Accounting and
Reporting Department.
To promote integrity on a broader level, we have
initiated a Company-wide financial integrity program
involving 15,000 managers, representing the entire middle
and top ranks of our organization. On February 16, 2004,
we announced our plans to implement the
recommendations of the Dutch Tabaksblat Committee on
corporate governance. At the March 3, 2004 Extraordinary
General Meeting of Shareholders, our shareholders
approved all agenda items to implement these
recommendations, including proposed amendments to our
Articles of Association. For additional information about the
above plans, please see "Corporate Governance - Part I:
Highlights of the New Structure" above.
We prepare our consolidated financial statements in
accordance with Dutch GAAP with a reconciliation to US
GAAP. The preparation of our consolidated financial
statements requires the use of estimates and
assumptions that affect the reported amounts of assets
and liabilities, including the disclosure of contingent
assets and contingent liabilities and the reported
amounts of revenue and expenses during the reporting
period. Our critical accounting policies are those that are
most important to our financial condition and results of
operations and those that require the most difficult,
subjective or complex judgments by our management.
On an on-going basis, management evaluates its
estimates and assumptions. Management bases its
estimates and assumptions on historical experience and
various other factors that are believed to be reasonable
under the circumstances, the results of which form the
basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from
other sources. Because of the uncertainty of factors
surrounding the estimates or judgments used in the
preparation of our consolidated financial statements,
actual results may vary from these estimates.
We believe that the following policies are our
critical accounting policies. For a summary of all our
significant accounting policies, including the critical
accounting policies discussed below, please see Note 2
to our consolidated financial statements included in this
annual report. We, along with our independent auditor,
have discussed our critical accounting policies with our
Audit Committee and our Corporate Executive Board.
We receive various types of allowances from vendors in
the form of up-front payments (or lump sum payments
or prepaid amounts), rebates (in the form of cash or
credits) and other forms of payments that effectively
reduce our cost of goods purchased from a vendor or
the cost of promotional activities conducted by us that
benefit the vendor.
Effective 2003, we changed our accounting for
vendor allowances in accordance with the guidance of the
Financial Accounting Standards Boards Emerging Issues
Task Force (EITF) Issue No. 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration
Received from a Vendor" ("EITF 02-16"). EITF 02-16
addresses the accounting and income statement
classification for allowances received from vendors.
Allowances received from vendors are presumed to be a
reduction in prices paid for the product and should be
recognized in cost of sales as the related inventory is sold,
unless specific criteria are met to recognize the allowance
as revenue or for treatment as reimbursement of specific,
incremental, identifiable costs. We recorded the
cumulative effect of this change in accounting policy of
EUR 100 as a reduction of opening shareholders' equity
under Dutch GAAP and income in the statements of
operations for 2003 under US GAAP. The change in
accounting principles is discussed in detail in Note 2 to
our consolidated financial statements.
Vendor allowances are only recorded if evidence
of a binding arrangement exists with the vendor and
receipt is both probable and estimable. The most
common allowances offered by vendors are (i) volume-
based allowances, which are off-invoice or amounts
billed back to vendors based on the quantity of products
