3 Significant accounting policies continued
Net sales
Cost of sales
Vendor allowances
Ahold
Annual Report 2010
Group at a glance
Performance
Governance
Financials
Notes to the consolidated financial statements continued
Foreign currency translation
The financial statements of subsidiaries, joint ventures, and
associates are prepared in their functional currencies, which are
determined based on the primary economic environment in which
they operate. Transactions in currencies other than the functional
currency are recorded at the rates of exchange prevailing on 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 the exchange rates prevailing at the balance sheet date.
Income and expense items are translated at the average exchange
rates for the respective periods. Investments in joint ventures and
associates with functional currency other than the euro are
translated into euros using exchange rates prevailing on the
balance sheet date. Exchange rate differences arising during
consolidation and on the translation of investments in joint ventures
and associates are included in 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; therefore the exchange rate differences relating
to these loans are also included in equity, in the currency translation
reserve.
On the disposal of a foreign operation resulting in loss of control,
loss of joint control, or loss of significant influence, the related
cumulative exchange rate difference that was included in equity is
transferred to the consolidated income statement. On the partial
disposal of a foreign operation not resulting in loss of control, the
related cumulative exchange rate difference that was included in
equity is proportionately re-attributed to the non-controlling interests
in that foreign operation. On the disposal of a foreign operation not
resulting in loss of joint control or loss of significant influence, the
related cumulative exchange rate difference that was included in
equity is proportionately transferred to the consolidated income
statement.
Segmentation
Ahold's operating segments are its retail operating companies that
engage in business activities from which they earn revenues and
incur expenses and whose operating results are regularly reviewed
by the Corporate Executive Board to make decisions about
resources to be allocated to the segments and assess their
performance. In establishing the reportable segments, certain
operating segments with similar economic characteristics have
been aggregated.
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 geographical regions based on
the location of stores.
Ahold generates and recognizes net sales to retail customers at the
point of sale in its stores and upon delivery of groceries to internet
customers. Ahold also generates revenues from the sale of
products to retail franchisees, which are recognized upon delivery.
Ahold recognizes franchise fees as revenue when all material
services relating to the contract have been substantially performed.
Future discounts earned by customers in connection with bonus or
loyalty cards and other company sponsored programs are deferred
on the balance sheet at the time of the sale and subsequently
recognized in the income statement when redeemed.
Generally, net sales and cost of sales are recorded based on the
gross amount received from the customer for products sold and the
amount paid to the vendor for products purchased. However, for
certain products or services, such as the sale of lottery tickets, third-
party prepaid phone cards, stamps, and public transportation
tickets, Ahold acts as an agent and consequently records the
amount of commission income in its net sales. Net sales exclude
sales taxes and value-added taxes.
Cost of sales includes the purchase price of the products sold and
other costs incurred in bringing the inventories to the location and
condition ready for sale. These costs include costs of purchasing,
storing, rent, depreciation of property, plant and equipment,
salaries, and transporting products to the extent that it relates to
bringing the inventories to the location and condition ready for sale.
Ahold receives various types of vendor allowances. The most
common allowances vendors offer are (i) volume allowances,
which are off-invoice or amounts billed back to vendors based on
the quantity of products sold to customers or purchased from the
vendor and (ii) promotional allowances, which relate to cooperative
advertising and market development efforts. Volume allowances
are recognized as a reduction of the cost of the related products as
they are sold. Promotional allowances are recognized as a
reduction of the cost of the related products when the Company
has performed the activities specified in the contract with the
vendor. If the contract does not specify any performance criteria,
the allowance is recognized over the term of the contract. Vendor
allowances are generally deducted from cost of sales, unless there
is clear evidence that they should be classified as revenue or a
reimbursement of costs. Ahold recognizes vendor allowances only
where there is evidence of a binding arrangement with the vendor,
the amount can be estimated reliably, and receipt is probable.
