Note 3
Leases and sale and leaseback transactions
Leases
Investment property
Gains and losses on disposals are determined by comparing the net proceeds with the carrying amount and are included in
operating income in the consolidated statements of operations.
Ahold is the lessee of buildings and equipment under operating and finance lease arrangements. Ahold classifies its leases
as finance leases when the lease agreement transfers substantially all the risks and rewards of ownership to Ahold. For leases
determined to be finance leases the asset and liability are recognized at an amount equal either to the fair value of the leased
asset or the present value of the minimum lease payments during the lease term, whichever is lower.
Leases that do not qualify as finance leases are classified as operating leases, and the related lease payments are expensed on
a straight-line basis over the lease term, including, as applicable, any rent free period during which Ahold has the right to use
the asset. For leases with renewal options where the renewal is reasonably assured, the lease term used to (i) determine the
appropriate lease classification, (ii) compute periodic rental expense and (iii) depreciate leasehold improvements (unless their
economic lives are shorter) includes the periods of expected renewals. Payments made to Ahold representing incentives to sign
a new lease or representing reimbursements for leasehold improvements are deferred and recognized on a straight-line basis
over the term of the lease as reductions to lease expense.
Sale and leaseback
The gain or loss on sale and leaseback transactions is recognized in the consolidated statements of operations immediately if
(i) Ahold does not maintain or maintains only minor continuing involvement in these properties, other than the required lease
payments, (ii) these transactions are established at fair value and (iii) substantially all risks and rewards of ownership are
transferred to the buyer-lessor. Otherwise, the leaseback is recorded as a finance lease and any gain or loss is deferred and
amortized over the term of the lease.
In some sale and leaseback arrangements, Ahold sells a property and only leases back a portion of that property. These
properties generally involve shopping centers, which contain an Ahold store as well as other stores leased to third-party
retailers. Ahold recognizes a sale and the profit thereon on the portion of the shopping center that is not leased back to the
extent that (i) the respective property is sold for fair value and (ii) the risks and rewards of owning stores, which are not leased
back to Ahold, have been fully transferred to the buyer. The leaseback of the Ahold store and any gain on the sale of the Ahold
store is accounted for under the sale and leaseback criteria described above.
In some sale and leaseback arrangements, Ahold subleases the property to third parties (including franchisees) and the
leaseback is not considered a 'normal' leaseback. In other arrangements, Ahold maintains a form of continuing involvement
in the property sold, such as earn-out provisions or obligations or options to repurchase the property. In such situations, the
transaction generally does not qualify for sale-leaseback accounting, but rather is accounted for as a financing transaction.
The carrying value of the asset remains on the consolidated balance sheet and the sale proceeds are recorded as a financing
obligation. The financing obligation is amortized over the lease term, using either the effective interest rate or Ahold's cost of
debt rate, whichever is higher. Once Ahold's continuing involvement ends, the sale is accounted for under the sale and
leaseback criteria described above.
In some instances, Ahold incurs construction costs for properties expected to be completed and sold within one year in sale
and leaseback transactions. These construction costs are classified as other current assets until the sale and leaseback occurs.
Investment property consists of land and buildings held by Ahold to earn rental income or for capital appreciation, or both.
These properties are not used by Ahold in the ordinary course of business. Ahold recognizes the part of an owned (or finance
leased) shopping center that is leased to third-party retailers as investment property, unless it represents an insignificant
portion of the property. Land and buildings leased to franchisees are not considered to be investment property as they
contribute directly to Ahold's retail operations.
The accounting measurement policies for investment property are similar to those for property, plant and equipment.
AHOLD ANNUAL REPORT 2005 95
