Notes to the
consolidated
financial statements
continued
3 Significant accounting policies continued
Overview
Business review
Governance
Financials
Investors
Ahold Delhaize Annual Report 2016
Leases and sale and leaseback transactions
Leases
Ahold Delhaize is a lessee of land, buildings and equipment under operating and finance lease arrangements. The Company classifies its leases as
finance leases when the lease agreement transfers substantially all of the risks and rewards of ownership to Ahold Delhaize. For leases determined
to be finance leases, the asset and liability are recognized based on their values 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 Delhaize has the right to use the asset. Payments made
to Ahold Delhaize 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.
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 split of the fair value between land and buildings, 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 Delhaize 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 Delhaize sells a property and only leases back a portion of that property. These properties
generally involve shopping centers that contain an Ahold Delhaize store as well as other stores leased to third-party retailers. In such situations,
the Company 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 Delhaize have been fully transferred
to the buyer. The leaseback of the Ahold Delhaize store and any gain on the sale of the Ahold Delhaize store is accounted for under the sale and
leaseback criteria described above.
In some sale and leaseback arrangements, Ahold Delhaize 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. Once Ahold Delhaize’s continuing involvement ends, the sale is accounted for under the sale and
leaseback criteria described above.
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.
