Management's discussion and analysis
Income taxes
The Company is subject to income taxes in several tax
jurisdictions and to its respective tax laws. Significant
judgment is required in determining the consolidated income
tax position. The ultimate tax effects of certain transactions
can be uncertain for a considerable period of time, requiring
management to estimate the related current and deferred
taxes. The Company recognizes liabilities for anticipated tax
audit issues based on estimates of whether additional taxes
will be due. Where the final outcome of such matters differs
from the amounts that were initially recognized, such
differences will impact the income tax expense in the period
in which such determinations are made.
The Company has material tax loss carryforward positions,
for which deferred tax assets are recognized to the extent
that it is probable that future taxable income, as estimated
by management, will be available against which these tax
losses can be utilized. In the event that actual results differ
from these estimates in future periods, changes to the
recognized deferred tax assets could be required, which
would impact the income tax expense.
Leases and sale and leaseback transactions
Determining whether a lease agreement is a finance or an
operating lease requires judgment as to whether the
agreement transfers substantially all the risks and rewards of
ownership to the Company. Judgment is required on various
aspects that include, but are not limited to, the fair value
of the leased asset, the economic life of the leased asset,
whether or not to include renewal options in the lease term
and determining an appropriate discount rate to calculate
the present value of the minimum lease payments.
Classification as a finance or operating lease determines
whether the leased asset is treated on-balance or off
balance. In sale and leaseback transactions, the
classification of the leaseback determines how the gain
or loss on the transaction is recognized. It is either deferred
and amortized (finance lease) or recognized immediately
(operating lease). In classifying the leaseback, similar
judgments have to be made as described above.
Equity method accounting of ICA
The Company accounts for its joint venture ICA under
the equity method, although its investment comprises
60 percent of the shares. The 60 percent shareholding stake
in ICA does not entitle the Company to unilateral decision
making authority over ICA due to the shareholders'
agreement with the Company's joint venture partner, which
provides that certain decisions will be made only on the
basis of mutual consent. On the basis of this shareholders'
agreement, the Company concluded that it has no control
over ICA and, consequently, does not consolidate ICA's
financial statements.
Classification of U.S. Foodservice as part
of continuing operations
Non-current assets and disposal groups are classified as
held for sale if their carrying amount will be recovered
through a sale transaction rather than through continuing
use. For this to be the case, the asset (or disposal group)
must be available for immediate sale in its present condition
and the sale must be highly probable.
A discontinued operation is a component of the Company
that either has been disposed of, or that is classified as held
for sale, and: (i) represents a separate major line of business
or geographical area of operations or (ii) is part of a single
coordinated plan to dispose of a separate major line of
business or geographical area of operations. Results from
discontinued operations are presented separately as a single
amount in the consolidated statements of operations.
Results from operations qualifying as discontinued
operations as of the balance sheet date for the latest period
presented, that have previously been presented as results
from continuing operations, are re-presented as results from
discontinued operations for all periods presented.
As of year-end 2006, Poland and JMR qualified as held for
sale and discontinued operations. The other businesses to
be divested did not qualify as held for sale as of year-end
2006, in the case of U.S. Foodservice because it is more
likely than not that the transaction between Ahold and the
purchaser of U.S. Foodservice must be submitted for
approval to the General Meeting of Shareholders of Ahold.
Future accounting changes
Ahold will be subject to new accounting guidelines under
IFRS and US GAAP, including the following:
In June 2006, the FASB issued Financial Interpretation
No. 48 "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"),
which is a change in accounting for income taxes. FIN 48
specifies how tax benefits for uncertain tax positions are
to be recognized, measured, and derecognized in financial
statements. Furthermore it requires certain disclosures of
uncertain matters, specifies how uncertain tax positions
should be classified on the balance sheet and provides
transition and interim guidance, among other provisions.
FIN 48 is effective for the Company as of 2007.
The Company is in the process of evaluating the impact
of FIN 48 on its future consolidated financial statements.
For more information on future accounting changes, see
Notes 3 and 35 to the consolidated financial statements
included in this Annual Report.
Risk management and use of financial
instruments and derivatives
The Company's primary market risk exposures, similar to
prior years, relate to currency exchange rates and interest
rate fluctuations and commodity price fluctuations. These
fluctuations could have a negative impact on the Company's
net income and financial position. In order to manage the
risk arising from these exposures, the Company may utilize
a variety of foreign exchange, interest rate and commodity
forward contracts and swaps. The Company uses such
financial instruments for the purpose of hedging exposures.
None of these financial instruments are used for trading or
speculative purposes.
For further description of Ahold's risk management and
use of derivatives, see Note 33 to the consolidated financial
statements included in this Annual Report.
54 Ahold Annual Report 2006
