Safeway 2009 Annual Report Download - page 42

SAFEWAY INC. AND SUBSIDIARIES
Critical Accounting Policies and Estimates
Critical accounting policies are those accounting policies that management believes are important to the portrayal of
Safeway’s financial condition and results of operations and require management’s most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Workers’ Compensation The Company is primarily self-insured for workers’ compensation, automobile and general
liability costs. It is the Company’s policy to record its self-insurance liability as determined actuarially, based on claims filed
and an estimate of claims incurred but not yet reported.
Self-insurance reserves are actuarially determined primarily by applying historical paid loss and incurred loss development
trends to current cash and incurred expected losses in order to estimate total losses. We then discount total expected
losses to their present value using a risk free rate of return.
Any actuarial projection of self-insured losses is subject to a high degree of variability. For example, self-insurance expense
was $128.8 million in fiscal 2009, $161.6 million in fiscal 2008 and $117.1 million in 2007. Litigation trends, legal
interpretations, benefit level changes, claim settlement patterns and similar factors influenced historical development
trends that were used to determine the current year expense and therefore contributed to the variability in annual
expense. However, these factors are not direct inputs into the actuarial projection, and thus their individual impact cannot
be quantified.
The discount rate is a significant factor that has led to variability in self-insured expenses. Since the discount rate is a
direct input into the estimation process, we are able to quantify its impact. The discount rate, which is based on the
United States Treasury Note rates for the estimated average claim life of five years, was 2.75% in 2009, 1.75% in 2008
and 3.5% in 2007. A 25-basis-point change in the discount rate affects the self-insured liability by approximately $4.3
million.
The majority of the Company’s workers’ compensation liability is from claims occurring in California. California workers’
compensation has received intense scrutiny from the state’s politicians, insurers, employers and providers, as well as the
public in general. Recent years have seen escalation in the number of legislative reforms, judicial rulings and social
phenomena affecting this business. Some of the many sources of uncertainty in the Company’s reserve estimates include
changes in benefit levels, medical fee schedules, medical utilization guidelines, vocation rehabilitation and apportionment.
Store Closures Safeway’s policy is to recognize losses relating to the impairment of long-lived assets when expected
net future cash flows are less than the assets’ carrying values. When stores that are under long-term leases close, Safeway
records a liability for the future minimum lease payments and related ancillary costs, net of estimated cost recoveries. In
both cases, fair value is determined by estimating net future cash flows and discounting them using a risk-adjusted rate of
interest. The Company estimates future cash flows based on its experience and knowledge of the market in which the
closed store is located and, when necessary, uses real estate brokers. However, these estimates project future cash flows
several years into the future and are affected by factors such as inflation, real estate markets and economic conditions.
At any one time, Safeway has a portfolio of closed stores which is widely dispersed over several markets. While individual
closed store reserves are likely to be adjusted up or down in the future to reflect changes in assumptions, the change to
the total closed store reserve has not been nor is expected to be material.
Employee Benefit Plans The Company recognizes in its statement of financial position an asset for its employee
benefit plan’s overfunded status or a liability for underfunded status. The Company measures plan assets and obligations
that determine the funded status as of fiscal year end. Additional disclosures are provided in Note K to the consolidated
financial statements, set forth in Part II, Item 8 of this report.
The determination of Safeway’s obligation and expense for pension benefits is dependent, in part, on the Company’s
selection of certain assumptions used by its actuaries in calculating these amounts. These assumptions are disclosed in
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