Note 3
Financial statements - Notes to the consolidated financial statements
3 Significant accounting policies
Changes in accounting policies
Rent during construction periods
Rental costs associated with operating leases and certain
executory costs (such as property taxes, insurance and
common area maintenance costs) that are incurred during
a construction period are recognized as operating expenses
as of 2006 whereas previously these costs were capitalized.
This change in accounting policy, which Ahold has applied
prospectively from the earliest date practicable, led to a
decrease of net income of EUR 11 and EUR 14 for 2005 and
2004, respectively, and a decrease of equity attributable to
common shareholders of EUR 24 as of December 28, 2003.
Financial guarantee contracts
As of 2006, issuers of certain financial guarantee contracts
are required under IAS 39 "Financial Instruments:
Recognition and Measurement" to include a liability in their
balance sheets representing the fair value of the guarantee
issued. Previously, these guarantees were off-balance sheet
commitments. This change in accounting policy, which
Ahold has applied retrospectively, had a negligible impact on
net income and equity attributable to common shareholders.
In the aggregate, these changes in accounting policies had
a negative impact of EUR 0.01 on basic and diluted net
income per share for both 2005 and 2004.
Consolidation
The consolidated financial statements incorporate the
financial statements of the Company and its subsidiaries.
Subsidiaries are entities over which the Company has
control. Control is the power to govern the financial and
operating policies, generally accompanying a shareholding
of more than one-half of the voting rights. The existence and
effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether the
Company controls another entity. Subsidiaries are fully
consolidated from the date that control commences until
the date that control ceases. All intra-group transactions,
balances, income and expenses are eliminated upon
consolidation. Unrealized losses on intra-group transactions
are eliminated unless the transaction provides evidence of
an impairment of the assets transferred.
Minority interests are recorded in the consolidated balance
sheets and the consolidated statements of operations for
the minority shareholders' share in the net assets and the
income or loss of subsidiaries, respectively. The interest of
minority shareholders in an acquired subsidiary is initially
measured at the minority interest's proportion of the net
fair value of the assets, liabilities and contingent
liabilities recognized. For 2006, 2005 and 2004, the minority
interests in the net assets and net income of subsidiaries
mainly relate to the minority shareholders' interest in
Schuitema N.V. ("Schuitema"), in which Ahold has a
73.2 percent interest. Schuitema applies the structure
regime (governance rules applicable to large companies
in the Netherlands). Ahold, as the majority shareholder,
controls all resolutions at the general meeting of
shareholders and has representation on the Supervisory
Board of Schuitema. Based on these rights, Ahold has
effective control over Schuitema and, accordingly,
Schuitema has been consolidated for all years presented.
Foreign currency translation
The financial statements of each subsidiary are prepared
in its functional currency, which is determined based on the
primary economic environment in which such subsidiary
operates. Transactions in foreign currencies are recorded
at the rates of exchange prevailing at the transaction dates.
At each balance sheet date, monetary items denominated in
foreign currencies are translated into the entity's functional
currency at the then prevailing rates. Exchange differences
arising on the settlement of monetary items, and on the
translation of monetary items, are included in net income for
the period. Goodwill and fair value adjustments arising on
the acquisition of a foreign entity are considered as assets
and liabilities denominated in the functional currency of the
foreign entity.
Upon consolidation, the assets and liabilities of subsidiaries
with a functional currency other than the euro are translated
into euros using exchange rates prevailing at the balance
sheet date. Income and expense items are translated at the
average exchange rates for the respective periods. Exchange
rate differences arising on consolidation are included in
group equity, in the currency translation reserve.
Intercompany loans to and from foreign entities for which
settlement is neither planned nor likely to occur in the
foreseeable future are considered to increase or decrease
the net investment in that foreign entity and the exchange
rate differences relating to these loans are therefore also
included in group equity, in the currency translation reserve.
On the disposal of a foreign operation, in part or in full, the
related cumulative exchange rate difference that was
included in group equity is transferred to the consolidated
statements of operations.
Segmentation
Ahold has determined its reportable segments based on
its internal reporting practices and on how the Company's
management evaluates the performance of operations
and allocates resources. A business segment is a group
of assets and operations engaged in providing products
or services that are subject to risks and returns that are
different from those of other business segments.
A geographical segment is a group of assets and operations
engaged in providing products or services within a particular
economic environment that are subject to risks and
returns that are different from segments operating in other
economic circumstances.
Performance of the segments is evaluated against several
measures, of which operating income is the most important.
Intersegment sales are executed under normal commercial
terms and conditions that would also be available to
unrelated third parties. Net sales are attributed to countries
based on the location of the store or distribution location.
62 Ahold Annual Report 2006