Safeway 2006 Annual Report Download - page 61

SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Employee Benefit Plans In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement
of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an
employer to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a
plan’s underfunded status, measure a plan’s assets and its obligations that determine its funded status as of the end of
the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in the
year in which the changes occur. Additional disclosures are also required. Safeway adopted SFAS No. 158 as of
December 30, 2006, as required. See Note I.
Self-Insurance The Company is primarily self-insured for workers’ compensation, automobile and general liability
costs. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but
not yet reported, and is discounted using a risk-free rate of interest. The present value of such claims was calculated
using a discount rate of 4.5% in 2006, 4.35% in 2005 and 3.25% in 2004.
A summary of changes in Safeway’s self-insurance liability is as follows (in millions):
2006 2005 2004
Beginning balance $ 532.4 $ 496.5 $ 407.2
Expense 133.2 193.7 249.7
Claim payments (152.9) (157.8) (160.4)
Ending balance 512.7 532.4 496.5
Less: current portion (138.7) (144.2) (140.3)
Long-term portion $ 374.0 $ 388.2 $ 356.2
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
$618.5 million at year-end 2006 and $634.3 million at year-end 2005.
Deferred Rent
Rent Escalations. The Company recognizes escalating rent provisions on a straight-line basis over the lease term.
Rent Holidays. Certain of the Company’s operating leases contain rent holidays. For these leases, Safeway 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 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. Accrued interest on tax deficiencies and refunds is included in the
income tax expense or benefit.
Income Tax Contingencies The Company is subject to periodic audits by the Internal Revenue Service and other
foreign, state and local taxing authorities. These audits may challenge certain of the Company’s tax positions such as
the timing and amount of deductions and allocation of taxable income to the various tax jurisdictions. Loss and gain
contingencies are accounted for in accordance with SFAS No. 5, “Accounting for Contingencies,” and may require
significant management judgment in estimating final outcomes. Actual results could materially differ from these
estimates and could significantly affect the effective tax rate and cash flows in future years.
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