Safeway 2004 Annual Report Download - page 39

SAFEWAY INC. 2004 ANNUAL REPORT 37
SAFEWAY INC. AND SUBSIDIARIES
The current portion of the self-insurance liability is
included in other accrued liabilities, and the long-term
portion is included in accrued claims and other liabilities in
the consolidated balance sheets. The total undiscounted
liability was $558.8 million at year-end 2004 and $451.4
million at year-end 2003.
RENT HOLIDAYS Certain of the Company’s operating leases
contain rent holidays. For these leases, the Company
recognizes the related rent expense on a straight-line basis at
the earlier of the first rent payment or the date of possession
of the leased property. The difference between the amounts
charged to expense and the rent paid is recorded as deferred
lease incentives and amortized over the lease term.
CONSTRUCTION ALLOWANCES As part of certain lease
agreements, the Company receives construction allowances
from landlords. The construction allowances are deferred
and amortized on a straight-line basis over the life of the
lease as a reduction to rent expense.
INCOME TAXES The Company provides income tax expense
or benefit in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 109, “Accounting for
Income Taxes.” Deferred income taxes represent future net
tax effects resulting from temporary differences between
the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The
Company has, from time to time, entered into interest rate
swap agreements to change its portfolio mix of fixed and
floating-rate debt to more desirable levels. Interest rate swap
agreements involve the exchange with a counterparty of
fixed and floating-rate interest payments periodically over
the life of the agreements without exchange of the underlying
notional principal amounts. The differential to be paid or
received is recognized over the life of the agreements as an
adjustment to interest expense. The Company’s counter-
parties have been major financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS Generally
accepted accounting principles require the disclosure of the
fair value of certain financial instruments, whether or not
recognized in the balance sheet, for which it is practicable
to estimate fair value. Safeway estimated the fair values
presented below using appropriate valuation methodologies
and market information available as of year-end. Considerable
judgment is required to develop estimates of fair value, and
the estimates presented are not necessarily indicative of
the amounts that the Company could realize in a current
market exchange. The use of different market assumptions
or estimation methodologies could have a material effect on
the estimated fair values. Additionally, these fair values
were estimated at year-end, and current estimates of fair
value may differ significantly from the amounts presented.
The following methods and assumptions were used to
estimate the fair value of each class of financial instruments:
Cash and equivalents, accounts receivable, accounts payable
and short-term debt. The carrying amount of these items
approximates fair value.
Long-term debt. Market values quoted on the New York Stock
Exchange are used to estimate the fair value of publicly
traded debt. To estimate the fair value of debt issues that
are not quoted on an exchange, the Company uses those
interest rates that are currently available to it for issuance
of debt with similar terms and remaining maturities. At
year-end 2004, the estimated fair value of debt was $6.4
billion compared to a carrying value of $6.1 billion. At year-
end 2003, the estimated fair value of debt was $7.5 billion
compared to a carrying value of $7.1 billion.
Off-balance-sheet instruments. The fair value of interest
rate swap agreements are the amounts at which they could
be settled based on estimates obtained from dealers. The
net unrealized gain on such agreements was $6.1 million at
year-end 2004.
STORE CLOSING AND IMPAIRMENT CHARGES Safeway
regularly reviews its stores’ operating performance and
assesses the Company’s plans for certain store and plant
closures. In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” losses
related to the impairment of long-lived assets are recognized
when expected future cash flows are less than the asset’s
carrying value. At the time a store is closed or because of
changes in circumstances that indicate the carrying value of
an asset may not be recoverable, the Company evaluates
the carrying value of the assets in relation to its expected
future cash flows. If the carrying value is greater than the
future cash flows, a provision is made for the impairment of
the assets to write the assets down to estimated fair value.