Safeway 2012 Annual Report Download - page 37

SAFEWAY INC. AND SUBSIDIARIES
25
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. 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
0.75% in 2012, 0.75% in 2011 and 2.00% in 2010. A 25-basis-point change in the discount rate affects the
self-insured liability by approximately $5 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 Lease Exit Costs and Impairment Charges Safeway assesses store impairment indicators
quarterly. 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 balance sheet a liability for the underfunded
status of its employee benefit plans. 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.