Notes: 31
180
Ahold Annual Report 2003
Financial Statements
8. Derivative instruments
Under Dutch GAAP, gains and losses from derivative financial instruments that are designated and qualify as hedges
are deferred and recognized in the consolidated statement of operations in the same period in which the underlying
hedge exposure affects earnings.
Under US GAAP, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
was adopted by the Company as of January 1, 2001. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including embedded derivatives, and for hedging activities. SFAS No. 133 requires that all
derivatives be recognized as either assets or liabilities in the consolidated balance sheet and measured at fair value.
Depending on the documented designation of a derivative instrument, any change in fair value is recognized either
in income or shareholders' equity (as a component of accumulated other comprehensive income). The effect of
adopting SFAS No. 133 on January 1, 2001, representing the initial re-valuation of derivative instruments, resulted
in an unrealized loss of EUR 20 (net of income tax benefit of EUR 4) that was recognized in the consolidated
statement of operations as a cumulative effect of a change in accounting principle and an unrealized gain of
approximately EUR 1 (comprising an asset of EUR 74 less a liability of EUR 79 net of income tax benefits of
EUR 6) that was recognized as a component of other comprehensive income.
SFAS No. 133 prescribes requirements for designation and documentation of hedging relationships and
ongoing retrospective and prospective assessments of effectiveness in order to qualify for hedge accounting.
Hedge accounting is considered to be appropriate if the assessment of hedge effectiveness indicates that the
change in fair value of the designated hedging instrument is 80% to 125% effective at offsetting the change
in fair value due to the hedged risk of the hedged item or transaction. Measurement of amounts to be recorded
in income due to ineffectiveness of hedges are based on the dollar-offset method as required by SFAS No. 133.
Contracts that do not in their entirety meet the definition of a derivative may contain embedded derivative
instruments. If certain conditions are met, SFAS No. 133 requires an embedded derivative to be separated from
its host contract and accounted for separately at fair value.
For qualifying fair value hedges, the change in the fair value of the derivative and the change in the fair value
of the hedged item that is due to the hedged risk(s) is recorded in income. If a derivative instrument qualifies as
a cash flow hedge, the effective portion of the hedging instrument's gain or loss is reported in shareholders' equity
as other comprehensive income and is reclassified into earnings in the period(s) during which the transaction
being hedged affects earnings. The ineffective portion of a hedging derivative's fair value change is recorded
in current earnings.
9. Valuation of ICA Put Option
In connection with the acquisition of its 50% interest in ICA in April 2000, the Company granted the ICA Put Option
to its joint venture partners. As described in more detail in Note 30, the joint venture partners have the right to sell
their shares in ICA to Ahold. The price at which the shares can be sold to Ahold includes a premium rate over the
value at which estimated price the Option Shares would be trading if ICA were deemed to be a publicly traded
company, the deemed fair market value.
Under Dutch GAAP, the ICA Put Option would only be recognized if the premium rate that the Company is
expected to pay over the deemed fair market value upon the exercise of the ICA Put Option is considered onerous,
which is not deemed to be the case.
Under US GAAP, the ICA Put Option is considered to be an in-the-money written put option that should be
recorded at fair value since the price at which the shares can be sold to the Company under the ICA Put Option
includes a premium rate in excess of the fair value of the Option shares. The fair value was estimated at
approximately EUR 459 at the date the 50% interest in ICA was purchased. Under US GAAP, EUR 459 was
recorded as part of the consideration paid to acquire the Company's 50% interest in ICA. Accordingly, the fair
value of the ICA Put Option has been reflected as an increase in the Company's investment in ICA at acquisition,
resulting in an increase of goodwill with an offsetting amount recorded as a liability. Subsequently, increases
in the fair value of EUR 60, EUR 31 and EUR 10 of the ICA Put Option have been recognized as a financial
expense in 2003, 2002 and 2001, respectively.
