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Ahold Annual Report 2003
Financial Statements
101
influence, are accounted for using the equity method. Under the equity method, as applied under Dutch GAAP,
the investment is carried at the cost of the Company's share in the net assets of the joint venture or equity investee
excluding goodwill, plus the Company's share in income or losses since acquisition, less dividends received. Ahold's
share in the net income (loss) of these investments is recorded in the line "Share in income (loss) of joint ventures
and equity investees" in the consolidated statements of operations. Significant influence is presumed to exist if at
least 20% of the voting stock is owned by Ahold. Goodwill arising from these acquisitions is recorded under
"Goodwill" on the balance sheet and amortized over a period not exceeding 20 years. Amortization of goodwill is
recorded in the line "Goodwill and intangible asset amortization" in the consolidated statements of operations.
Equity investees in which Ahold does not have the ability to exercise significant influence are accounted for by
the cost method. Dividends and other gains and losses from these investments are recorded under "Other financial
income and expense" in the consolidated statements of operations.
The Company periodically reviews whether there are indicators that equity investments are impaired. If
indicators of impairment exist, the Company reviews its equity investments for which fair value is less than the
carrying value to determine if the decline in value is other than temporary. If the decline in value is considered
to be other than temporary, an impairment loss is recognized to reduce the carrying value of the investment to its
fair value.
In case an equity investee's equity becomes negative, the Company continues to record the share in losses
for that equity investee, if it has either issued declarations of assumption of liability or has a firm intention to enable,
up to the Company's share, payments of debts by the equity investee. Any direct or indirect loans with those equity
investees are provided for to the extent of their non-recoverable amount.
Value Added Service Providers
USF has had product financing arrangements with Value Added Service Providers ("VASPs"). USF does not own
any shares in the VASPs, nor does it have any voting interest in these companies. Each VASP, at the request or with
the consent of USF, will purchase certain commodities and products from third parties, then mark-up and resell
such products to USF. Although these VASPs are not owned by USF, they are almost entirely dependent on their
sales to USF. The VASPs provide varying degrees of support to USF primarily in the purchase of private label and
signature brand products. USF engages in direct business discussions with the VASPs' ultimate vendors to ensure
that price, product specification and quality requirements are met and to take advantage of volume purchasing
power. The VASPs' purchases are funded almost entirely by USF with interest-free advances and by the extension
of trade credit by vendors, some of which has been guaranteed by USF. A portion of the VASPs sales price to USF
is subsequently passed back to USF, leaving the VASPs with predetermined transaction fees, amounting to EUR 15,
EUR 15 and EUR 9 in 2003, 2002 and 2001, respectively. The transaction fee, which includes reimbursements for
holding costs associated with the inventory, is intended to be sufficient to allow the VASPs to recover substantially all
of their operating costs with a limited profit. USF uses the invoice price from the VASPs as its cost in sales made to
its customers under "cost plus" contracts. Additionally, since USF has guaranteed certain of the obligations of the
VASPs and ultimately retains the risks and rewards related to the inventory and related payables of the VASPs,
Dutch GAAP and US GAAP require the recognition of certain of these inventories and related payables of the VASPs
within Ahold's consolidated financial statements, consistent with the approach under SFAS No. 49 "Accounting for
Product Financing Arrangements".
During the third quarter of 2003, the Company reached a decision to cease doing business with the VASPs
by early 2004. That decision was communicated to the VASPs prior to December 28, 2003 and resulted in claims
made by the VASPs for reimbursement by the Company of certain costs they would incur as a result of this decision,
principally relating to employee severance and unavoidable lease commitments. During the third quarter
of 2003 and subsequently, the VASPs quantified and reduced those claims and the Company accrued a EUR 8
liability representing the probable minimum costs expected to be incurred as a result of the VASPs claims. In
December 2003, we entered into a termination and settlement agreement relating to four of the five VASPs. On
December 27, 2003, we adjusted the accrual to approximately USD 20 (EUR 17) million, reflecting the effects of
the changes to previously estimated costs resulting from the settlement reached with four of the five VASPs and the
anticipated cost of the settlement with the remaining VASP.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost comprises all costs of purchase, cost of
conversion and other costs incurred in bringing the inventories to their present location and condition, net of vendor
allowances applicable to inventory. The cost of inventories is determined using the first-in, first-out (FIFO) method.
Effective December 29, 2002, under Dutch GAAP, the Company applies the guidance of EITF 02-16 as
described in more detail in "Change in accounting principles relating to vendor allowances" above. This change
resulted in a reduction of Ahold's opening inventory balance as of December 29, 2002 by EUR 152.
