3 Significant accounting policies continued
Notes to the consolidated financial statements continued
Ahold
Annual Report 2010
Group at a glance
Performance
Governance
Financials
Investors
A discontinued operation is a component of the Company that
either has been disposed of, or is classified as held for sale, and
represents a separate major line of business or geographical area
of operations or 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 that are clearly identifiable as
part of the component disposed of and that will not be recognized
subsequent to the disposal are presented separately as a single
amount in the consolidated income statement. Results and cash
flows from discontinued operations are reclassified for prior periods
and presented in the financial statements so that the results and
cash flows from discontinued operations relate to all operations that
have been discontinued as of the balance sheet date for the latest
period presented.
Property, plant and equipment
Items of property, plant and equipment are stated at cost less
accumulated depreciation and impairment losses. Cost includes
expenditures that are directly attributable to the acquisition or
construction of an asset and borrowing costs incurred during
construction. Where applicable, estimated asset retirement costs
are added to the cost of an asset. Subsequent expenditures are
capitalized only when it is probable that future economic benefits
associated with the item will flow to the Company and the costs can
be measured reliably. All other subsequent expenditures represent
repairs and maintenance and are expensed as incurred.
Depreciation is computed using the straight-line method based on
the estimated useful lives of the items of property, plant and
equipment, taking into account the estimated residual value. Where
an item of property, plant and equipment comprises major
components having different useful lives, each such part is
depreciated separately. The assets' useful lives are reviewed, and
adjusted, if appropriate, at each balance sheet date.
The estimated useful lives of property, plant and equipment are:
Land indefinite
Buildings 30 - 40 years
Building components 7 - 20 years
Machinery and equipment 5 - 12 years
Other 3 - 10 years
Depreciation of assets subject to finance leases and leasehold
improvements is calculated on a straight-line basis over either the
lease term (including renewal periods when renewal is reasonably
assured) or the estimated useful life of the asset, whichever is
shorter.
Investment property
Investment property consists of land and buildings held by Ahold to
earn rental income or for capital appreciation, or both. These
properties are not used by Ahold in the ordinary course of business.
Ahold often owns (or leases under a finance lease) shopping
centers containing both an Ahold store and third-party retail units. In
these cases, the third-party retail units generate rental income, but
are primarily of strategic importance for operating purposes to
Ahold in its retail operations. Ahold recognizes the part of an owned
(or leased under a finance lease) shopping center that is leased to
third-party retailers as investment property, unless it represents an
insignificant portion of the property. Land and buildings leased to
franchisees are not considered to be investment property as they
contribute directly to Ahold's retail operations. Investment property
is measured on the same basis as property, plant and equipment.
Leases and sale and leaseback transactions
Leases
Ahold is a lessee of land, buildings, and equipment under operating
and finance lease arrangements. Ahold classifies its leases as
finance leases when the lease agreement transfers substantially all
the risks and rewards of ownership to Ahold. For leases determined
to be finance leases, the asset and liability are recognized at the
inception of the lease at an amount equal either to the fair value of
the leased asset or the present value of the minimum lease
payments during the lease term, whichever is lower. Lease
payments are apportioned between interest charges and a
reduction of the lease liability so as to achieve a constant rate of
interest on the remaining liability balance. Contingent rentals are
expensed as incurred.
Leases that do not qualify as finance leases are classified as
operating leases, and the related lease payments are expensed on
a straight-line basis over the lease term, including, as applicable,
any rent-free period during which Ahold has the right to use the
asset. 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 rental expense.
For leases with renewal options where the renewal is reasonably
assured, the lease term used to (i) determine the appropriate lease
classification, (ii) compute periodic rental expense, and (iii)
depreciate leasehold improvements (unless their economic lives
are shorter) includes the periods of expected renewals.
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.