Management's discussion and analysis
Litigation
Contingent liabilities
Representations, warranties and indemnities
In disposing of assets or businesses, the Company has
provided in the relevant sales agreements certain customary
representations and warranties including but not limited
to, completeness of books and records, title to assets,
schedule of material contracts and arrangements, litigation,
permits, labor matters and employee benefits and taxes.
The Company also in certain cases has agreed to indemnify
the buyer against certain risks. The Company is unable
to estimate the potential liability from such indemnities or
claims relating to representations and warranties because
they relate to unknown conditions. However, the Company
has no reason to believe that these uncertainties would have
a material adverse effect on its financial position, results
of operations or liquidity. For a more detailed discussion
of such representations, warranties and indemnities in
connection with the Company's disposition of assets or
businesses, see Note 34 to the consolidated financial
statements included in this Annual Report.
Third-party leases
The Company and its subsidiaries may be contingently liable
for leases that have been assigned to various third parties
in connection with divestments, facility closings and asset
dispositions. In particular, the Company and its subsidiaries
may be contingently liable under guarantees of 422 leases
in connection with the divestments of BI-LO, Bruno's and
the Tops' Wilson Farms and SugarCreek convenience stores
and in connection with the closure of the Tops' Northeast
Ohio store division. The Company could be required to
assume financial lease obligations if any of the assignees are
unable to fulfill their lease obligations. Since the assignments
have been made to numerous and different third parties
and because the Company has available various remedies,
Ahold believes the likelihood that it will be required to
assume a material amount of these obligations is remote.
In addition, Stop Shop may be contingently liable to
landlords under certain leases that were assigned in
connection with Stop Shop's spin-off in 1992 of
Bradlees Stores, Inc. ("Bradlees") and that were
subsequently assumed and assigned to third parties in
connection with bankruptcy proceedings with respect to
Bradlees. For information about legal proceedings in
connection with certain leases of Bradlees, see "Stop
Shop Bradlees Lease Litigation with Vornado" in Note 34
to the consolidated financial statements included in this
Annual Report.
Insurance
U.S. Foodservice and Ahold's U.S. retail operating
companies are insured through a wholly-owned, captive
insurance subsidiary, MollyAnna, for certain losses related to
its self-insurance and high deductible programs for general
liability, workers' compensation and commercial vehicle
liability. MollyAnna provides insurance policies to Ahold's
operating companies which have policy limits per
occurrence of USD 2 million for general liability,
USD 5 million for workers' compensation and USD 5 million
for commercial vehicle liability. The expected ultimate cost of
claims is estimated based upon analysis of historical data
and actuarial assumptions. Ahold's future loss payments
are therefore inherently uncertain. The Company records
a provision for this self-insurance program on its balance
sheets, which is actuarially determined based on claims filed
and an estimate of claims incurred but not reported.
See Note 25 to the consolidated financial statements
included in this Annual Report.
Ahold is also party to various legal proceedings and
investigations relating to its businesses. For a detailed
discussion of these proceedings, see Note 34 to the
consolidated financial statements included in this
Annual Report.
Critical accounting policies and estimates
Background
In the preparation of the consolidated financial statements
the Company makes a number of estimates and
assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities, of revenues
and expenses and the disclosure of contingent assets and
liabilities. Estimates and assumptions may differ from future
actual results.
The estimates, assumptions and judgments used in each
of the Company's significant critical accounting policies are
discussed below. For additional information on these and
other accounting policies, see Notes 2 and 3 to the
consolidated financial statements included in this
Annual Report. For a discussion of the principal differences
between IFRS and US GAAP accounting policies, see
Note 35 to the consolidated financial statements included in
this Annual Report. Management, along with the Company's
independent auditor, has discussed the critical accounting
policies with the Audit Committee.
Impairment of non-current assets
Ahold evaluates its non-current assets for impairment
whenever events or changes in circumstances indicate
that their carrying value may not be recoverable.
Regardless of the existence of impairment indicators,
non-current assets with indefinite lives are tested for
impairment at least annually.
In evaluating its non-current assets for impairment, the
Company compares the carrying amount of an asset (or the
cash-generating unit ("CGU") to which the asset belongs)
to the recoverable amount, defined as the higher of the fair
value less cost to sell and the value in use. For the purpose
of impairment testing, the Company allocates goodwill
to CGUs which are expected to benefit from a business
combination. In estimating discounted future net cash
flows, management makes significant assumptions.
These include determining the appropriate discount rate,
projected sales growth, operating margin, and projected
amount for capital expenditures and divestments. In making
these assumptions, the Company considers historical
results, adjusted to reflect current and anticipated
operating conditions.
52 Ahold Annual Report 2006
