2 www.ahold.com/reports2008
Notes to the consolidated financial statements
3 Significant accounting policies continued
Leases and sale and leaseback transactions
Leases
Intangible assets
Financial statements
AHOLD ANNUAL REPORT 2008 53
Ahold is a lessee of 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 lease 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.
Sale and leaseback
The gain or loss on sale and operating leaseback transactions is
recognized in the consolidated 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.
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 and leaseback accounting, but rather is
accounted for as a financing transaction ("financing"). The
carrying amount of the asset remains on the consolidated
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. Each unit (or group of units) to which
the goodwill is allocated, represents 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
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.
