3 Significant accounting policies continued
Intangible assets
Ahold
Annual Report 2010
Group at a glance
Performance
Governance
Financials
Notes to the consolidated financial statements continued
Leases and sale and leaseback transactions continued
Sale and leaseback
The gain or loss on sale and operating leaseback transactions is
recognized in the income statement 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 occur 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. In such
situations, Ahold recognizes a sale and the resulting profit 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 that 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
and leaseback accounting, but rather is accounted for as a
financing transaction (financing). The carrying amount 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 and impairment of 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
each of the cash-generating units (or groups of cash-generating
units) that is expected to benefit from the synergies of a business
combination. Goodwill is allocated to a cash-generating unit (or
group of cash-generating units) representing the lowest level within
the Company at which the goodwill is monitored for internal
management purposes and is never larger than an operating
segment before aggregation. 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 cash-generating unit's carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of a
cash-generating unit'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 cash-generating unit. An impairment loss recognized
for goodwill is not reversed in subsequent periods.
On the partial or complete disposal of an operation, the goodwill
attributable to that operation 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, less accumulated amortization and impairment losses.
Customer relationships acquired in business acquisitions are stated
at fair value determined using an income approach. Direct costs
related to development of software for internal use are capitalized
only if the costs can be measured reliably, technological feasibility
has been established, future economic benefits are probable, and
the Company intends to complete development and to use the
software. All other costs, including 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.
Amortization is computed using the straight-line method based on
the estimated useful lives, which are as follows:
Customer relationships 7 - 10 years
Software 3 - 10 years
Lease-related intangibles remaining duration of the lease
Other 5 - indefinite
The useful lives are reviewed, and adjusted if appropriate, at each
balance sheet date.