Note 3
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.
Determining whether a lease agreement is a finance or an
operating lease requires judgment on various aspects that
include 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.
Sale and leaseback
The gain or loss on sale and operating 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 and
(ii) these transactions are established at fair value. Any gain
or loss on sale and finance leaseback transactions is
deferred and amortized over the term of the lease. In
classifying the leaseback in a sale and leaseback
transaction, similar judgments have to be made as
described above under "Leases".
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 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) or
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 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.
Goodwill
Goodwill represents the excess of the cost of an acquisition
over the Company's interest in the net fair value of the
identifiable assets, liabilities and contingent liabilities at
the date of acquisition, and is carried at cost less
accumulated impairment losses. Goodwill on acquisitions of
joint ventures and associates is included in the carrying
amount of the investment.
For the purposes of impairment testing, goodwill is allocated
to cash-generating units (or groups of cash-generating units)
that represent the lowest level within the Company at which
the goodwill is monitored for internal management purposes
and that is not larger than a segment. Cash-generating units
to which goodwill has been allocated are tested for
impairment annually, or more frequently when there is an
indication that the cash-generating unit may be impaired.
Goodwill on acquisitions of joint ventures and associates is
assessed for impairment as part of the investment whenever
there is an indication that the investment may be impaired.
An impairment loss is recognized for the amount by which
the asset's carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset's fair value
less cost to sell and its value in use. An impairment loss is
allocated first to reduce the carrying amount of the goodwill
and then to the other assets of the cash-generating unit
pro-rata on the basis of the carrying amount of each asset in
the unit. An impairment loss recognized for goodwill is not
reversed in a subsequent period.
On the partial or complete disposal of an operation,
the attributable amount of goodwill is included in the
determination of the gain or loss on disposal.
Other intangible assets
Other intangible assets are stated at fair value determined at
the date of acquisition of the related underlying business, or
at cost if they are separately acquired or represent internally
developed software.
Brand names and customer relationships acquired in
business acquisitions are stated at fair value determined
using an income approach. Direct costs related to the
development of software for internal use are capitalized as
intangible assets after technological feasibility has been
established. All costs incurred prior to the establishment of
technological feasibility, as well as all overhead, general and
administrative and training costs, are expensed as incurred.
Lease-related intangible assets, consisting primarily of
favorable operating lease contracts acquired in business
acquisitions, are measured at the present value of the
amount by which the contract terms are favorable relative to
market prices at the date of acquisition.
The estimated useful lives of other intangible assets are:
Brand names indefinite
Customer relationships 7 - 10 years
Software 3 - 6 years
Lease-related intangibles remaining duration of the lease
Other 5 - indefinite
The useful lives of brand names have been determined on
the basis of factors such as the economic environment,
the expected use of the asset and related assets or groups of
assets and legal or other provisions that might limit the useful
life. Based on this assessment, the useful life is determined
to be indefinite, since there is no foreseeable limit to the
period of time over which brand names are expected to
contribute to the cash flows of the Company.
Ahold Annual Report 2006 65
