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3 Significant accounting policies continued
Ahold
Annual Report 2011
Groupata glance
Performance
Governance
Investors
Notes to the consolidated financial statements continued
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. These
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 the determination of 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 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.
Intangible assets
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.