20-F 1 d147864d20f.htm 20-F 20-F
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

¨     REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934

OR

þ     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended January 3, 2016

OR

¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from                        to                       

OR

¨     SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                       

Commission file number: 001-12510

Koninklijke Ahold N.V.

(Exact name of registrant as specified in its charter)

Royal Ahold

(Translation of registrant’s name into English)

The Netherlands

(Jurisdiction of incorporation or organization)

Provincialeweg 11

1506 MA Zaandam

The Netherlands

Tel: +31-88-659-5100

(Address of executive offices)

Guy Thomson

Provincialeweg 11

1506 MA Zaandam

The Netherlands

Tel: +31-88-659-5100

E-mail: guy.thomson@ahold.com

(Name, Telephone, E-mail and address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class                          Name of each exchange on which registered

None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Ordinary Shares, nominal value €0.01 per share

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the
close of the period covered by the annual report: 818,471,229

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ¨    No  þ

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ¨    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ¨    No  þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  þ

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ¨    International Financial Reporting Standards as issued by the International Accounting

Standards Board  þ  Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨    No þ

 

 

 

 


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EXPLANATORY NOTE

On January 28, 2016, the Securities and Exchange Commission (the “SEC”) declared effective the Registration Statement on Form F-4 (Commission File No. 333-209098) (“Form F-4 Registration Statement”) of Koninklijke Ahold N.V., a limited liability company (naamloze vennootschap) incorporated under Dutch law, relating to Koninklijke Ahold N.V.’s business combination transaction with Delhaize Group NV/SA.

Rule 15d-2 (“Rule 15d-2”) under the Securities Exchange Act of 1934, as amended, provides generally that if a company’s registration statement under the Securities Act of 1933, as amended, does not contain certified financial statements for the company’s last full fiscal year preceding the year in which the registration statement becomes effective then the company must, within the later of 90 days after the effective date of the registration statement or four months following the end of the registrant’s latest full fiscal year, file a special financial report furnishing certified financial statements for the last full fiscal year, meeting the requirements of the form appropriate for annual reports of that company. Rule 15d-2 further provides that the special financial report is to be filed under cover of the facing sheet of the form appropriate for annual reports of the company.

The Form F-4 Registration Statement did not contain the certified financial statements of Koninklijke Ahold N.V. for the year ended January 3, 2016; therefore, as required by Rule 15d-2, Koninklijke Ahold N.V. is hereby filing the certified financial statements of Koninklijke Ahold N.V. with the SEC under cover of the facing page of an annual report on Form 20-F.


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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

     1   

Consolidated Income Statements

     2   

Consolidated Statements of Comprehensive Income

     3   

Consolidated Balance Sheets

     4   

Consolidated Statements of Changes in Equity

     5   

Consolidated Statements of Cash Flows

     6   

Notes to the Consolidated Financial Statements

     7   

1 The Company and its operations

     7   

2 Basis of preparation

     7   

3 Significant accounting policies

     9   

4 Acquisitions

     23   

5 Assets and liabilities held for sale and discontinued operations

     24   

6 Segment reporting

     27   

7 Net sales

     30   

8 Expenses by nature

     30   

9 Net financial expenses

     31   

10 Income taxes

     32   

11 Property, plant and equipment

     37   

12 Investment property

     39   

13 Intangible assets

     41   

14 Investments in joint ventures and associates

     43   

15 Other non-current financial assets

     45   

16 Inventories

     46   

17 Receivables

     46   

18 Other current financial assets

     48   

19 Cash and cash equivalents

     48   

20 Equity attributable to common shareholders

     49   

21 Loans and credit facilities

     52   

22 Other non-current financial liabilities

     53   

23 Pensions and other post-employment benefits

     56   

24 Provisions

     65   

25 Other non-current liabilities

     68   

26 Other current financial liabilities

     68   

27 Other current liabilities

     68   

28 Cash flow

     69   

29 Earnings per share

     71   

30 Financial risk management and financial instruments

     72   

31 Related party transactions

     79   

32 Share-based compensation

     86   

33 Operating leases

     92   

34 Commitments and contingencies

     93   

35 Merger with Delhaize

     99   

36 Subsequent events

     99   

37 List of subsidiaries, joint ventures and associates

     100   


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Report of Independent Registered Public Accounting Firm

To the Shareholders of Koninklijke Ahold N.V.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in equity and cash flows present fairly, in all material respects, the financial position of Koninklijke Ahold N.V. and its subsidiaries at January 3, 2016 and December 28, 2014, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 2016 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers Accountants N.V.

Amsterdam, The Netherlands

March 2, 2016

/s/ P.J. van Mierlo RA


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Consolidated Income Statements

For the years 2015, 2014 and 2013

 

million, except per share data    Note      2015     2014     2013  

Net sales

     7         38,203        32,774        32,615   

Cost of sales

     8         (27,835     (24,088     (23,933

Gross profit

              10,368        8,686        8,682   

Selling expenses

        (7,722     (6,424     (6,293

General and administrative expenses

              (1,328     (1,012     (1,150

Total operating expenses

     8         (9,050     (7,436     (7,443
                                   

Operating income

              1,318        1,250        1,239   

Interest income

        5        6        7   

Interest expense

        (235     (212     (225

Net interest expense on defined benefit pension plans

     23         (14     (16     (24

Other financial expenses

              (21     (13     (49

Net financial expenses

     9         (265     (235     (291
                                   

Income before income taxes

              1,053        1,015        948   

Income taxes

     10         (224     (248     (153

Share in income of joint ventures

     14         20        24        10   

Income from continuing operations

              849        791        805   

Income (loss) from discontinued operations

     5         2        (197     1,732   

Net income

              851        594        2,537   
                                   

Attributable to:

         

Common shareholders

        852        594        2,537   

Non-controlling interests

              (1              

Net income

              851        594        2,537   

Earnings per share

     29          

Net income per share attributable to common shareholders

         

Basic

        1.04        0.68        2.48   

Diluted

        1.02        0.67        2.39   

Income from continuing operations per share attributable to common shareholders

         

Basic

        1.04        0.90        0.79   

Diluted

              1.02        0.88        0.77   

The accompanying notes are an integral part of these consolidated financial statements.


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Consolidated Statements of Comprehensive Income

For the years 2015, 2014 and 2013

 

million    Note      2015     2014     2013  

Net income

        851        594        2,537   

Remeasurements of defined benefit pension plans

         

Remeasurements before taxes - income (loss)

     23         (53     (25     230   

Income taxes

     10         11        21        (83

Other comprehensive income (loss) that will not be reclassified to profit or loss

        (42     (4     147   

Currency translation differences in foreign interests:

         

Currency translation differences before taxes from:

         

Continuing operations

        450        389        (149

Discontinued operations

                      30   

Cumulative translation differences from divestments transferred to net income

     5                       (82

Income taxes

     10         (1            1   

Cash flow hedges:

         

Fair value result in the year

        39        (76     (10

Transfers to net income

        (27     9        70   

Income taxes

     10         (3     16        (15

Other comprehensive income of joint ventures - net of income taxes:

         

Share of other comprehensive income from continuing operations

     14         1                 

Other comprehensive loss transferred to net income

     5                       9   

Other comprehensive income (loss) reclassifiable to profit or loss

        459        338        (146
                                   

Total other comprehensive income

              417        334        1   
                                   

Total comprehensive income

              1,268        928        2,538   
                                   

Attributable to:

         

Common shareholders

        1,269        928        2,538   

Non-controlling interests

              (1              

Total comprehensive income

              1,268        928        2,538   
                                   

Attributable to:

         

Continuing operations

        1,266        1,125        849   

Discontinued operations

     5         2        (197     1,689   

Total comprehensive income

              1,268        928        2,538   

The accompanying notes are an integral part of these consolidated financial statements.


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Consolidated Balance Sheets

For the years 2015 and 2014

 

million    Note      January 3,
2016
    December 28,
2014
 

Assets

       

Property, plant and equipment

     11         6,677        6,150   

Investment property

     12         580        560   

Intangible assets

     13         1,968        1,763   

Investments in joint ventures and associates

     14         212        206   

Other non-current financial assets

     15         516        482   

Deferred tax assets

     10         628        494   

Other non-current assets

              39        35   

Total non-current assets

              10,620        9,690   

Assets held for sale

     5         3        7   

Inventories

     16         1,676        1,589   

Receivables

     17         837        728   

Other current financial assets

     18         596        323   

Income taxes receivable

        14        59   

Prepaid expenses and other current assets

        308        118   

Cash and cash equivalents

     19         1,826        1,624   

Total current assets

              5,260        4,448   

Total assets

              15,880        14,138   

Equity and liabilities

                         

Equity attributable to common shareholders

     20         5,622        4,844   

Non-controlling interests

              (1       

Group equity

              5,621        4,844   

Loans

     21         1,522        1,410   

Other non-current financial liabilities

     22         2,187        2,039   

Pensions and other post-employment benefits

     23         389        290   

Deferred tax liabilities

     10         110        150   

Provisions

     24         731        663   

Other non-current liabilities

     25         318        276   

Total non-current liabilities

              5,257        4,828   

Accounts payable

        2,800        2,655   

Other current financial liabilities

     26         330        280   

Income taxes payable

        39        22   

Provisions

     24         260        240   

Other current liabilities

     27         1,573        1,269   

Total current liabilities

              5,002        4,466   

Total equity and liabilities

              15,880        14,138   

The accompanying notes are an integral part of these consolidated financial statements.


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Consolidated Statements of Changes in Equity

For the years 2015, 2014 and 2013

 

million    Note      Share
capital
    Additional
paid-in
capital
    Currency
translation
reserve
    Cash flow
hedging
reserve
    Other reserves
including
accumulated
deficit1
    Equity
attributable
to common
shareholders
 

Balance as of December 30, 2012

        318        8,713        (292     (126     (3,467     5,146   

Net income attributable to common shareholders

                                    2,537        2,537   

Other comprehensive income (loss)

                            (200     45        156        1   
Total comprehensive income (loss) attributable to common shareholders                       (200     45        2,693        2,538   

Dividends

                                    (457     (457

Share buyback

                                    (768     (768

Share-based payments

                                          61        61   

Balance as of December 29, 2013

     20         318        8,713        (492     (81     (1,938     6,520   

Net income attributable to common shareholders

                                    594        594   

Other comprehensive income (loss)

                            389        (51     (4     334   
Total comprehensive income (loss) attributable to common shareholders                       389        (51     590        928   

Dividends

                                    (414     (414

Capital repayment

        (308     (809                   109        (1,008

Share buyback

                                    (1,232     (1,232

Cancelation of treasury shares

        (1     (1,060                   1,061          

Share-based payments

                                          50        50   

Balance as of December 28, 2014

     20         9        6,844        (103     (132     (1,774     4,844   

Net income attributable to common shareholders

                                    852        852   

Other comprehensive income (loss)

                            449        9        (41     417   
Total comprehensive income attributable to common shareholders                       449        9        811        1,269   

Dividends

                                    (396     (396

Share buyback

                                    (161     (161

Cancelation of treasury shares

        (1     (785                   786          

Share-based payments

                                          66        66   

Balance as of January 3, 2016

     20         8        6,059        346        (123     (668     5,622   
1        Other reserves include the remeasurements of defined benefit plans.

The accompanying notes are an integral part of these consolidated financial statements.


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Consolidated Statements of Cash Flows

For the years 2015, 2014 and 2013

 

million    Note      2015     2014     2013  

Income from continuing operations

        849        791        805   

Adjustments for:

         

Net financial expenses

        265        235        291   

Income taxes

        224        248        153   

Share in income (loss) of joint ventures

        (20     (24     (10

Depreciation, amortization, write-downs and impairments

        1,043        910        916   

Gains on the sale of assets / disposal groups held for sale

        (18     (20     (28

Share-based compensation expenses

              47        43        43   

Operating cash flows before changes in operating assets and liabilities

              2,390        2,183        2,170   

Changes in working capital:

         

Changes in inventories

        31        1        (13

Changes in receivables and other current assets

        (237     (33     73   

Changes in payables and other current liabilities

        215        146        (21

Changes in other non-current assets, other non-current liabilities and provisions

              (33     (135     (42

Cash generated from operations

        2,366        2,162        2,167   

Income taxes paid - net

              (227     (269     (116

Operating cash flows from continuing operations

        2,139        1,893        2,051   

Operating cash flows from discontinued operations

              (6     (17     (16

Net cash from operating activities

              2,133        1,876        2,035   

Purchase of non-current assets

        (804     (732     (811

Divestments of assets / disposal groups held for sale

        51        77        52   

Acquisition of businesses, net of cash acquired

     28         (150     (190     (9

Divestment of businesses, net of cash divested

     28                (291     2,352   

Changes in short-term deposits and similar instruments

        (247     1,222        (1,472

Dividends received from joint ventures

     14         21        18        27   

Interest received

        4        6        6   

Other

              1        (1     (1

Investing cash flows from continuing operations

        (1,124     109        144   

Investing cash flows from discontinued operations

                            135   

Net cash from investing activities

              (1,124     109        279   

Interest paid

        (227     (207     (216

Repayments of loans

        (31     (24     (21

Repayments of finance lease liabilities

        (104     (80     (73

Dividends paid on common shares

     20         (396     (414     (457

Share buyback

     20         (161     (1,232     (768

Capital repayment

     20                (1,008       

Other cash flows from derivatives

        (22     (20     (19

Other

              5        (3     (75

Financing cash flows from continuing operations

        (936     (2,988     (1,629

Financing cash flows from discontinued operations

                     (2     (4

Net cash from financing activities

        (936     (2,990     (1,633

Net cash from operating, investing and financing activities

              73        (1,005     681   

Cash and cash equivalents at the beginning of the period (excluding restricted cash)

     28         1,615        2,497        1,864   

Effect of exchange rate differences on cash and cash equivalents

              131        123        (48

Cash and cash equivalents at the end of the year (excluding restricted cash)

     28         1,819        1,615        2,497   

The accompanying notes are an integral part of these consolidated financial statements.


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Notes to the Consolidated Financial Statements

1 The Company and its operations

The principal activity of Koninklijke Ahold N.V. (Ahold or the Company or Group or Ahold group), a public limited liability company with its registered seat in Zaandam, the Netherlands, is the operation of retail stores in Europe and the United States through subsidiaries and joint ventures. Ahold’s significant subsidiaries, joint ventures and associates are listed in Note 37.

2 Basis of preparation

These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB).

Historical cost is used as the measurement basis unless otherwise indicated.

Ahold’s financial year is a 52- or 53-week period ending on the Sunday nearest to December 31. Financial year 2015 consisted of 53 weeks and ended on January 3, 2016. The comparative financial year 2014 consisted of 52 weeks and ended on December 28, 2014. The comparative financial year 2013 consisted of 52 weeks and ended on December 29, 2013.

The consolidated financial statements were authorized for issue by the Supervisory Board on March 2, 2016.

These consolidated financial statements are presented in euros (). The following exchange rates of the euro against the U.S. dollar ($) and the Czech crown (CZK) have been used in the preparation of these financial statements:

 

      2015      2014      2013  

U.S. dollar

        

Average exchange rate

     0.9001         0.7529         0.7533   

Year-end closing exchange rate

     0.9208         0.8213         0.7277   

Czech crown

        

Average exchange rate

     0.0366         0.0363         0.0385   

Year-end closing exchange rate

     0.0369         0.0360         0.0365   

The preparation of financial statements requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. All assumptions, expectations and forecasts used as a basis for certain estimates within these financial statements represent good faith assessments of Ahold’s future performance for which management believes there is a reasonable basis. They involve risks, uncertainties and other factors that could cause the Company’s actual future results, performance and achievements to differ materially from those forecasted. The estimates, assumptions and judgments that management considers most critical relate to:

Vendor allowances (Notes 3 and 17)

 

The Company must estimate the allowances that are earned based on fulfillment of its related obligations, many of which require management to estimate the volume of purchases that will be made during a period of time. The Company must also estimate the amount of related product that has been sold and the amount that remains in ending inventories and allocate the allowance to cost of sales or inventories accordingly.

Income taxes (Notes 3, 10 and 34)

 

The ultimate tax effects of transactions may be uncertain for a considerable period of time, requiring management to estimate the related current and deferred tax positions. The Company recognizes liabilities for uncertain tax positions when it is more likely than not that additional tax will be due. Judgment is required in determining whether deferred tax assets are realizable and therefore recognized in the balance sheet.

Intangible assets (Notes 3, 4 and 13)

 

Intangible assets acquired in a business acquisition are stated at fair value, as determined at the date of the acquisition. To determine the fair value at the acquisition date, judgments and estimates are required.

 

7


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2 Basis of preparation—(Continued)

 

Leases and sale and leaseback transactions (Notes 3, 22 and 33)

 

The classification of leases as finance leases or operating leases requires judgments about the fair value of the leased asset, the split of the fair value between land and buildings, the economic life of the asset, whether or not to include renewal options in the lease term and the appropriate discount rate to calculate the present value of the minimum lease payments.

Revenue recognition with respect to sale and leaseback transactions depends on whether the Company transfers all risks and rewards to the buyer, does not maintain (or maintains only minor) continuing involvement in the property other than the lease payments and whether the transaction is established at fair value.

Impairments (Notes 3, 8, 11, 12 and 13)

 

Judgments and estimates are required, not only to determine whether there is an indication that an asset may be impaired, but also whether indications exist that impairment losses previously recognized may no longer exist or may have decreased (impairment reversal).

Company and multi-employer pension obligations (Notes 3 and 23)

 

The present value of the pension obligations depends on a number of assumptions that are determined on an actuarial basis. The assumptions used in determining the net cost (income) for pensions include the discount rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. Other key assumptions comprise longevity and future salary and pension increases. Additional information is disclosed in Note 23.

Provisions and contingencies (Notes 3, 24 and 34)

 

The recognition of provisions requires estimates and judgment regarding the timing and the amount of outflow of resources. The main estimates are as follows:

 

    Self-insurance program: estimates and assumptions include an estimate of claims incurred but not yet reported, historical loss experience, projected loss development factors, estimated changes in claim reporting patterns, claim settlement patterns, judicial decisions and legislation.

 

    Loyalty programs: estimated cost of benefits to which customers participating in the loyalty program are entitled, which includes assumptions on redemption rates. These estimates and assumptions apply to all loyalty programs, irrespective of whether they are accounted for as sales deferrals or provisions for future payments made at redemption.

 

    Claims and legal disputes: management, supported by internal and external legal counsel, where appropriate, determines whether it is more likely than not that an outflow of resources will be required to settle an obligation. If this is the case, the best estimate of the outflow of resources is recognized.

 

    Severance and termination benefits: the provisions relate to separation plans and agreements and use the best information available at the time. The amounts that are ultimately incurred may change as the plans are executed.

 

    Onerous contracts: mainly relate to unfavorable lease contracts and include the excess of the unavoidable costs of meeting the obligations under the contracts over the benefits expected to be received under such contracts.

Fair value measurements

For financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

 

  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.

 

  Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).

 

  Level 3 inputs are unobservable inputs for the asset or liability.

 

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Consolidation

The consolidated financial statements incorporate the financial figures of the Company and its subsidiaries. Subsidiaries are entities over which the Company has control. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date that control commences until the date that control ceases. All intra-group transactions, balances, income and expenses are eliminated upon consolidation. Unrealized losses on intra-group transactions are eliminated, unless the transaction provides evidence of an impairment of the assets transferred.

Non-controlling interests are recorded, as appropriate, on the consolidated balance sheet, in the consolidated income statement, and in the consolidated statement of comprehensive income for the non-controlling shareholders’ share in the net assets and the income or loss of subsidiaries. Non-controlling shareholders’ interest in an acquired subsidiary is initially measured at the non-controlling interest’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognized. Ahold does not have subsidiaries with non-controlling interests that are material to the Group.

Foreign currency translation

The financial statements of subsidiaries, joint ventures and associates are prepared in their functional currencies, which are determined based on the primary economic environment in which they operate. Transactions in currencies other than the functional currency are recorded at the rates of exchange prevailing on the transaction dates. At each balance sheet date, monetary items denominated in foreign currencies are translated into the entity’s functional currency at the then prevailing rates. Exchange differences arising on the settlement and translation of monetary items are included in net income for the period. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are considered as assets and liabilities denominated in the functional currency of the foreign entity.

Upon consolidation, the assets and liabilities of subsidiaries with a functional currency other than the euro are translated into euros using the exchange rates prevailing at the balance sheet date. Income and expense items are translated at the average exchange rates for the respective periods. Exchange rate differences arising during consolidation and on the translation of investments in subsidiaries are included in other comprehensive income and in equity, in the currency translation reserve. Intercompany loans to and from foreign entities for which settlement is neither planned nor likely to occur in the foreseeable future are considered to increase or decrease the net investment in that foreign entity; therefore the exchange rate differences relating to these loans are also included in other comprehensive income and in equity, in the currency translation reserve.

On the disposal of a foreign operation resulting in loss of control, loss of joint control or loss of significant influence, the related cumulative exchange rate difference that was included in equity is transferred to the consolidated income statement.

Segmentation

Ahold’s operating segments are its retail operating companies that engage in business activities from which they earn revenues and incur expenses and whose operating results are regularly reviewed by the Management Board to make decisions about resources to be allocated to the segments and to assess their performance. In establishing the reportable segments, certain operating segments with similar economic characteristics have been aggregated. As Ahold’s operating segments offer similar products using complementary business models, and there is no discernible difference in customer bases, Ahold’s policy on aggregating its operating segments into reportable segments is based on geography and functional currency.

The segments’ performance is evaluated against several measures, of which operating income is the most important. Intersegment sales are executed under normal commercial terms and conditions that would also be available to unrelated third parties. Net sales are attributed to geographic regions based on the location of stores.

Net sales

Ahold generates and recognizes net sales to retail customers at the point of sale in its stores and upon delivery of goods through its online channel. Ahold also generates revenues from the sale of products to retail franchisees that are recognized upon delivery. Ahold recognizes franchise fees as revenue when all material services relating to the contract have been substantially performed.

 

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Revenue from the sale of gift cards and gift certificates is recognized when the gift card or gift certificate is redeemed by the retail customer. Future discounts earned by customers in connection with bonus or loyalty cards and other company-sponsored programs are deferred on the balance sheet at the time of the sale and subsequently recognized in the income statement when redeemed.

Generally, net sales and cost of sales are recorded based on the gross amount received from the customer for products sold and the amount paid to the vendor for products purchased, excluding sales taxes and value-added taxes. However, for certain products or services, such as sales through its online Plaza platform, the sale of lottery tickets, third-party prepaid phone cards, stamps and public transportation tickets, Ahold acts as an agent and consequently records the amount of commission income in its net sales.

 

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Cost of sales

Cost of sales includes the purchase price of the products sold and other costs incurred in bringing the inventories to the location and condition ready for sale. These costs include costs of purchasing, storing, rent, depreciation of property, plant and equipment, salaries, and transporting products to the extent that it relates to bringing the inventories to the location and condition ready for sale.

Vendor allowances

Ahold receives various types of vendor allowances. The most common allowances vendors offer are (i) volume allowances, which are off-invoice or amounts billed back to vendors based on the quantity of products sold to customers or purchased from the vendor and (ii) promotional allowances, which relate to cooperative advertising and market development efforts. Volume allowances are recognized as a reduction of the cost of the related products as they are sold. Promotional allowances are recognized as a reduction of the cost of the related products when the Company has performed the activities specified in the contract with the vendor. If the contract does not specify any performance criteria, the allowance is recognized over the term of the contract. Vendor allowances are generally deducted from cost of sales, unless there is clear evidence that they should be classified as revenue or a reimbursement of costs. Ahold recognizes vendor allowances only where there is evidence of a binding arrangement with the vendor, the amount can be estimated reliably and receipt is probable.

The accounting for vendor allowances requires a number of estimates. First, the Company must estimate the allowances that are earned based on the fulfillment of its related obligations, many of which require management to estimate the volume of purchases that will be made during a period of time. Second, the Company needs to estimate the amount of related product that was sold and the amount that remains in ending inventories and accordingly allocate the allowance to cost of sales or inventories. Management makes this estimate based on the turnover of the inventories and allocates a portion of the related vendor allowance to ending inventories until such product is estimated to have been sold to customers.

Selling expenses

Selling expenses relate to our store and online operations and consist of employees’ salaries and wages, store expenses, rent income and rent expense or depreciation related to stores, advertising costs and other selling expenses.

General and administrative expenses

General and administrative expenses consist of support office employees’ salaries and wages, rent and depreciation of support offices, impairment losses and reversals, gains and losses on the sale of non-current assets and disposal groups held for sale, restructuring costs, and other general and administrative expenses.

Share-based compensation

The grant date fair value of equity-settled share-based compensation plans is expensed, with a corresponding increase in equity, on a straight-line basis over the vesting periods of the grants. The cumulative expense recognized at each balance sheet date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of shares that will eventually vest. No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition (e.g., total shareholder return). Those are treated as vested irrespective of whether or not the market condition is ultimately satisfied, provided that all non-market conditions (e.g., continued employment) are satisfied.

Income taxes

Income tax expense represents the sum of current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized directly in equity or other comprehensive income. Current tax expense is based on the best estimate of taxable income for the year, using tax rates that have been enacted or substantively enacted at the balance sheet date and adjustments for current taxes payable (receivable) for prior years. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and the corresponding tax basis used in the computation of taxable income. Deferred tax assets and liabilities are generally recognized for all temporary differences. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill. Deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit or loss. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized.

Deferred tax assets, including deferred tax assets for tax loss carryforward positions and tax credit carryforward positions, are recognized to the extent that it is probable that future taxable income will be available against which temporary differences, unused tax losses or unused tax credits can be utilized. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the assets to be recovered.

Deferred tax assets and liabilities are not discounted. Deferred income tax assets and liabilities are offset on the balance sheet when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to income taxes levied by the same fiscal authority. Current income tax assets and liabilities are offset on the balance sheet when there is a legally enforceable right to offset and when the Company intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

The ultimate tax effects of some transactions can be uncertain for a considerable period of time, requiring management to estimate the related current and deferred tax positions. The Company recognizes liabilities for uncertain tax positions when it is more likely than not that additional taxes will be due. These liabilities are presented as current income taxes payable, except in jurisdictions where prior tax losses are being carried forward to be used to offset future taxes that will be due; in these instances the liabilities are presented as a reduction to deferred tax assets.

 

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Non-current assets held for sale and discontinued operations

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition and its sale must be highly probable. Non-current assets (or disposal groups) classified as held for sale are measured at the lower of the asset’s carrying amount and the fair value less costs of disposal. Depreciation or amortization of an asset ceases when it is classified as held for sale. Equity accounting ceases for an investment in a joint venture or associate when it is classified as held for sale; instead, dividends received are recognized in the consolidated income statement.

A discontinued operation is a component of the Company that either has been disposed of or is classified as held for sale, and represents a separate major line of business or geographical area of operations or is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations. Results from discontinued operations that are clearly identifiable as part of the component disposed of and that will not be recognized subsequent to the disposal are presented separately as a single amount in the consolidated income statement. Results and cash flows from discontinued operations are reclassified for prior periods and presented in the financial statements so that the results and cash flows from discontinued operations relate to all operations that have been discontinued as of the balance sheet date for the latest period presented.

Property, plant and equipment

Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition or construction of an asset and borrowing costs incurred during construction. Where applicable, estimated asset retirement costs are added to the cost of an asset. Subsequent expenditures are capitalized only when it is probable that future economic benefits associated with the item will flow to the Company and the costs can be measured reliably. All other subsequent expenditures represent repairs and maintenance and are expensed as incurred.

Depreciation is computed using the straight-line method based on the estimated useful lives of the items of property, plant and equipment, taking into account the estimated residual value. Where an item of property, plant and equipment comprises major components having different useful lives, each such part is depreciated separately. The assets’ useful lives are reviewed at each balance sheet date and adjusted if appropriate.

The estimated useful lives of property, plant and equipment are:

 

Land

     indefinite   

Buildings

     30-40 years   

Material handling systems (in warehouses)

     20-30 years   

Building components

     7-20 years   

Machinery and equipment

     5-12 years   

Other

     3-10 years   

Depreciation of assets subject to finance leases and leasehold improvements is calculated on a straight-line basis over either the lease term (including renewal periods when renewal is reasonably assured) or the estimated useful life of the asset, whichever is shorter.

Investment property

Investment property consists of land and buildings held by Ahold to earn rental income or for capital appreciation, or both. These properties are not used by Ahold in the ordinary course of business. Ahold often owns (or leases under a finance lease) shopping centers containing both an Ahold store and third-party retail units.

In these cases, the third-party retail units generate rental income, but are primarily of strategic importance for operating purposes to Ahold in its retail operations. Ahold recognizes the part of an owned (or leased under a finance lease) shopping center that is leased to third-party retailers as investment property, unless it represents an insignificant portion of the property. Land and buildings leased to franchisees are not considered to be investment property as they contribute directly to Ahold’s retail operations. Investment property is measured on the same basis as property, plant and equipment.

 

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Leases and sale and leaseback transactions

Leases

Ahold is a lessee of land, buildings and equipment under operating and finance lease arrangements. Ahold classifies its leases as finance leases when the lease agreement transfers substantially all of the risks and rewards of ownership to Ahold. 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 has the right to use the asset. Payments made to Ahold 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.

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.

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 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 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 sells a property and only leases back a portion of that property. These properties generally involve shopping centers that contain an Ahold store as well as other stores leased to third-party retailers. In such situations, Ahold 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 have been fully transferred to the buyer. The leaseback of the Ahold store and any gain on the sale of the Ahold store is accounted for under the sale and leaseback criteria described above.

In some sale and leaseback arrangements, Ahold 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’s continuing involvement ends, the sale is accounted for under the sale and leaseback criteria described above.

Intangible assets

Goodwill and impairment of goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities at the date of acquisition, and is carried at cost less accumulated impairment losses. Goodwill on acquisitions of joint ventures and associates is included in the carrying amount of the investment.

For the purposes of impairment testing, goodwill is allocated to each of the cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of a business combination. Goodwill is allocated to a cash-generating unit (or group of cash-generating units) representing the lowest level within the Company at which the goodwill is monitored for internal management purposes and is never larger than an operating segment before aggregation.

 

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Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the cash-generating unit may be impaired. Goodwill on acquisitions of joint ventures and associates is assessed for impairment as part of the investment whenever there is an indication that the investment may be impaired. An impairment loss is recognized for the amount by which the cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of a cash-generating unit’s fair value less cost to sell and its value in use. An impairment loss is allocated first to reduce the carrying amount of the goodwill and then to the other assets of the cash-generating unit pro-rata on the basis of the carrying amount of each asset in the cash-generating unit. An impairment loss recognized for goodwill is not reversed in subsequent periods.

On the partial or complete disposal of an operation, the goodwill attributable to that operation is included in the determination of the gain or loss on disposal.

Other intangible assets

Separately acquired intangible assets and internally developed software are carried at cost less accumulated amortization and impairment losses. Intangible assets acquired in a business combination are recognized at fair value at the date of acquisition (which is regarded as their cost).

Customer relationships acquired in business acquisitions are stated at fair value determined using an income approach. Direct costs related to the development of software for internal use are capitalized only if the costs can be measured reliably, technological feasibility has been established, future economic benefits are probable, and the Company intends to complete development and to use the software. All other costs, including all overhead, general and administrative, and training costs, are expensed as incurred. Lease-related intangible assets, consisting primarily of favorable operating lease contracts acquired in business acquisitions, are measured at the present value of the amount by which the contract terms are favorable relative to market prices at the date of acquisition.

Amortization is computed using the straight-line method based on estimated useful lives, which are as follows:

 

  Customer relationships

  7-25 years  

  Software

  3-10 years  

  Lease-related intangibles

  remaining expected duration of the lease  

  Brand names

  indefinite  

  Other

  5-indefinite  

The useful lives are reviewed at each balance sheet date and adjusted, if appropriate.

Investments in joint arrangements and associates

Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations each investor has rather than the legal structure of the joint arrangement. Joint operations arise where Ahold has rights to the assets and obligations relating to the arrangement and therefore accounts for its share of assets, liabilities, revenue and expenses. Joint ventures arise where Ahold has rights to the net assets of the arrangement and therefore equity accounts for its interest.

Associates are entities over which Ahold has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Significant influence is the power to participate in the financial and operating policy decisions of the entity but is not control or joint control over those policies. Associates are accounted for using the equity method.

Under the equity method, investments in joint ventures and associates are measured initially at cost and subsequently adjusted for post-acquisition changes in Ahold’s share of the net assets of the investment (net of any accumulated impairment in the value of individual investments). Where necessary, adjustments are made to the financial figures of joint ventures and associates to ensure consistency with the accounting policies of the Company.

Unrealized gains on transactions between Ahold and its joint ventures and associates are eliminated to the extent of Ahold’s stake in these investments. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the assets transferred.

Impairment of non-current assets other than goodwill

Ahold assesses on a quarterly basis whether there is any indication that non-current assets may be impaired. If indicators of impairment exist, Ahold estimates the recoverable amount of the asset. If it is not possible to estimate the recoverable amount of an individual asset, Ahold estimates the recoverable amount of the cash-generating unit to which it belongs. Individual stores are considered separate cash-generating units for impairment testing purposes.

The recoverable amount is the higher of an asset’s fair value less cost to sell and the asset’s value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognized in the income statement for the amount by which the asset’s carrying amount exceeds its recoverable amount.

 

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In subsequent years, Ahold assesses whether indications exist that impairment losses previously recognized for non-current assets other than goodwill may no longer exist or may have decreased. If any such indication exists, the recoverable amount of that asset is recalculated and, if required, its carrying amount is increased to the revised recoverable amount. The increase is recognized in operating income as an impairment reversal. An impairment reversal is recognized only if it arises from a change in the assumptions that were used to calculate the recoverable amount. The increase in an asset’s carrying amount due to an impairment reversal is limited to the depreciated amount that would have been recognized had the original impairment not occurred.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost consists of all costs of purchase, cost of conversion, and other costs incurred in bringing the inventories to their location and condition ready for sale, net of vendor allowances attributable to inventories. For certain inventories, cost is approximated using the retail method, in which the sales value of the inventories is reduced by the appropriate percentage of gross margin. The cost of inventories is determined using either the first-in, first-out (FIFO) method or the weighted average cost method, depending on their nature or use. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated marketing, distribution and selling expenses.

Financial instruments

Financial assets and liabilities

Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of a financial instrument. Financial assets are derecognized when the rights to receive cash flows from the financial assets expire, or if the Company transfers the financial asset to another party and does not retain control or substantially all risks and rewards of the asset. Financial liabilities are derecognized when the Company’s obligations specified in the contract expire or are discharged or canceled. Purchases and sales of financial assets in the normal course of business are accounted for at settlement date (i.e., the date that the asset is delivered to or by the Company).

At initial recognition, management classifies its financial assets as either (i) at fair value through profit or loss, (ii) loans and receivables, (iii) held to maturity or (iv) available-for-sale, depending on the purpose for which the financial assets were acquired. Financial assets are initially recognized at fair value. For instruments not classified as at fair value through profit or loss, any directly attributable transaction costs are initially recognized as part of the asset value. Directly attributable transaction costs related to financial assets at fair value through profit or loss are expensed when incurred.

The fair value of quoted investments is based on current bid prices. If the market for a financial asset is not active, or if the financial asset represents an unlisted security, the Company establishes fair value using valuation techniques. These include the use of recent arm’s-length transactions, reference to other instruments that are substantially the same, and discounted cash flow analysis, making maximum use of market inputs. Subsequent to initial recognition, financial assets are measured as described below. At each balance sheet date, the Company assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired.

Investments at fair value through profit or loss

Investments at fair value through profit or loss are those investments that are either held for trading or designated as such by the Company. A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Financial instruments held for trading are measured at fair value and changes therein are recognized in the income statement.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortized cost using the effective interest method, less any impairment losses. They are included in current assets, except for loans and receivables with maturities greater than 12 months after the balance sheet date.

Held to maturity financial assets

Held to maturity financial assets are non-derivative financial assets with fixed or determinable payments and a fixed maturity that the Company has the positive intention and ability to hold to maturity. They are carried at amortized cost using the effective interest method, less any impairment losses. They are included in current assets, except for held to maturity financial assets with maturities greater than 12 months after the balance sheet date.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are either designated in this category of financial assets or not classified in any of the other categories. They are measured at fair value based on quoted market prices with changes therein recognized directly in equity until the investment is derecognized or determined to be impaired, at which time the cumulative gain or loss previously recorded in equity is transferred to the income statement. Investments in equity instruments that do not have a quoted market price and whose fair value cannot be reliably measured are carried at cost. Available-for-sale financial assets are included in non-current assets unless management intends to dispose of the investment within 12 months after the balance sheet date.

 

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Cash and cash equivalents

Cash and cash equivalents include all cash on hand balances, checks, debit and credit card receivables, short-term highly liquid cash investments, and time deposits with original maturities of three months or less. Time deposits and similar instruments with original maturities of more than three months but less than 12 months are classified as other current financial assets. Bank overdrafts are included in short-term borrowings.

Loans and short-term borrowings

Loans and short-term borrowings are recognized initially at fair value, net of transaction costs incurred. Loans and short-term borrowings are subsequently stated at amortized cost, unless they are designated as fair value hedges. Any difference between the proceeds and redemption value is recognized in the income statement over the period of the loans and short-term borrowings using the effective interest method. Loans are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Derivative financial instruments

All derivative financial instruments are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. Gains and losses resulting from the fair value remeasurement are recognized in the income statement as fair value gains (losses) on financial instruments, unless the derivative qualifies and is effective as a hedging instrument in a designated hedging relationship. In order for a derivative financial instrument to qualify as a hedging instrument for accounting purposes, the Company must document (i) at the inception of the transaction, the relationship between the hedging instrument and the hedged item, as well as its risk management objectives and strategy for undertaking various hedging transactions and (ii) its assessment, both at hedge inception and on an ongoing basis, of whether the derivative that is used in the hedging transaction is highly effective in offsetting changes in fair values or cash flows of hedged items. Derivatives that are designated as hedges are accounted for as either cash flow hedges or fair value hedges.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized initially in the cash flow hedging reserve, a separate component of equity. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. Amounts accumulated in equity are reclassified into the income statement in the same period in which the related exposure impacts the income statement. When a cash flow hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecasted transaction is ultimately recognized in the income statement. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss existing in equity is immediately recognized in the income statement.

Fair value changes of derivative instruments that qualify for fair value hedge accounting treatment are recognized in the income statement in the periods in which they arise, together with any changes in fair value of the hedged asset or liability. If the hedging instrument no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of the hedged item is amortized in the income statement over the remaining period to maturity of the hedged item.

Reinsurance assets and liabilities

Under Ahold’s self-insurance program, part of the insurance risk is ceded under a reinsurance treaty, which is a pooling arrangement between unrelated companies. Reinsurance assets include estimated receivable balances related to reinsurance contracts purchased by the Company. Reinsurance liabilities represent the expected insurance risks related to reinsurance contracts sold by the Company. Reinsurance assets and liabilities are measured on a discounted basis using accepted actuarial methods.

Financial guarantees

Financial guarantees are recognized initially as a liability at fair value. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the obligation and the amount initially recognized less cumulative amortization.

 

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Equity

Equity instruments issued by the Company are recorded at the value of proceeds received. Own equity instruments that are bought back (treasury shares) are deducted from equity. Incremental costs that are directly attributable to issuing or buying back own equity instruments are recognized directly in equity, net of the related tax. No gain or loss is recognized in the income statement on the purchase, sale, issuance or cancelation of the Company’s own equity instruments.

 

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3 Significant accounting policies—(Continued)

 

Cumulative preferred financing shares

Cumulative preferred financing shares, for which dividend payments are not at the discretion of the Company, are classified as non-current financial liabilities and are stated at amortized cost. The dividends on these cumulative preferred financing shares are recognized as interest expense in the income statement, using the effective interest method. From the date when Ahold receives irrevocable notification from a holder of cumulative preferred financing shares to convert these shares into common shares, the cumulative preferred financing shares are classified as a separate class of equity.

Pension and other post-employment benefits

The net assets and net liabilities recognized on the consolidated balance sheet for defined benefit plans represent the actual surplus or deficit in Ahold’s defined benefit plans measured as the present value of the defined benefit obligations less the fair value of plan assets. Any surplus resulting from this calculation is limited to the present value of available refunds and reductions in future contributions to the plan.

Defined benefit obligations are actuarially calculated on the balance sheet date using the projected unit credit method. The present value of the defined benefit obligations is determined by discounting the estimated future cash outflows using market yields on high-quality corporate bonds (i.e., bonds rated AA or higher) denominated in the currency in which the benefits will be paid, and that have an average duration similar to the expected duration of the related pension liabilities.

Defined benefit costs are split into three categories:

 

    Service cost, past service cost, gains and losses on curtailment and settlements

 

    Net interest expense or income

 

    Remeasurement

The first category is presented as labor costs within operating earnings. Past-service costs are recognized in the income statement in the period of plan amendment. Results from curtailments or settlements are recognized immediately.

Past service years within the Dutch pension fund are calculated based upon a methodology that uses the maximum past service years based on accrued benefits or a participant’s actual date of hire.

Net interest is calculated by applying the discount rate to the net defined benefit liability or asset and is presented within net financial expenses.

Remeasurements, comprising actuarial gains and losses, the effect of the asset ceiling (if applicable) and the return on plan assets (excluding interest) are recognized immediately in the balance sheet with a charge or credit to other comprehensive income in the period in which it occurs. Remeasurements recorded in other comprehensive income are not recycled to the income statement.

Contributions to defined contribution plans are recognized as an expense when employees have rendered service entitling them to the contributions. Post-employment benefits provided through industry multi-employer plans, managed by third parties, are generally accounted for under defined contribution criteria.

For other long-term employee benefits, such as long-service awards, provisions are recognized on the basis of estimates that are consistent with the estimates used for the defined benefit obligations, however discounted using Ahold’s cost of debt rate. For these, all actuarial gains and losses are recognized in the income statement immediately.

Provisions

Provisions are recognized when (i) the Company has a present (legal or constructive) obligation as a result of past events, (ii) it is more likely than not that an outflow of resources will be required to settle the obligation, and (iii) the amount can be reliably estimated. The amount recognized is the best estimate of the expenditure required to settle the obligation. Provisions are discounted whenever the effect of the time value of money is significant.

The provision for the Company’s self-insurance program is recorded based on claims filed and an estimate of claims incurred but not yet reported. The provision includes expenses incurred in the claim settlement process that can be directly associated with specific claims. Other expenses incurred in the claim settlement process are expensed when incurred. The Company’s estimate of the required liability of such claims is recorded on a discounted basis, utilizing an actuarial method based upon various assumptions that include, but are not limited to, historical loss experience, projected loss development factors and actual payroll costs.

 

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3 Significant accounting policies—(Continued)

 

Restructuring-related provisions are recognized when the Company has approved a detailed formal restructuring plan and the restructuring has either commenced or has been announced to those affected by it. Onerous contract provisions are measured at the amount by which the unavoidable costs to fulfill agreements exceeds the expected benefits from such agreements.

 

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3 Significant accounting policies—(Continued)

 

New accounting policies effective for 2015

Contributions from employees to defined benefit plans—Amendments to IAS 19

 

The objective of the amendments was to simplify the accounting for contributions that are independent of the number of years of employee service, for example, employee contributions that are calculated according to a fixed percentage of salary. The simplification was to allow entities the option to recognize employee contributions as a reduction of service costs in the period in which the related service is rendered, instead of attributing the employee contributions to periods of service. The amendments have no impact on the Group, as Ahold has chosen not to avail itself of the practical expedient offered in the amendments.

IFRIC 21 Levies

 

IFRIC 21 addresses the issue of when to recognize a liability to pay a levy imposed by a government. The interpretation defines a levy and specifies that the obligating event that gives rise to the liability is the activity that triggers the payment of the levy, as identified by legislation. The adoption of IFRIC 21 does not have a significant financial effect on the consolidated financial statements of the Group.

Annual improvements to IFRSs 2010-2012 and to IFRSs 2011-2013

 

Annual improvements to IFRSs 2010-2012 Cycle and annual improvements to IFRSs 2011-2013 Cycle made a number of amendments to various IFRSs, which did not have a significant effect on the consolidated financial statements.

New accounting policies not yet effective for 2015

The IASB issued several standards, or revisions to standards, that are not yet effective for 2015, but will become effective in coming years.

Amendments to IAS 1, “Disclosure Initiative,” clarify existing disclosure requirements. Most of the amendments were made to address interpretations of the original wording in IAS 1. Specifically, the amendments allow preparers more freedom in applying materiality when deciding what must be disclosed, even if a standard requires specific disclosures. Other disclosure clarifications relate to the presentation order of notes and the use of subtotals to further disaggregate required disclosures. The amendments to IAS 1 apply prospectively for annual periods beginning on or after January 1, 2016. The Company does not anticipate that the application of these amendments to IAS 1 will have a significant effect on the results of future consolidated financial statements, but they may alter the manner in which certain financial information is presented.

Amendments to IFRS 10, IFRS 12, and IAS 28, “Investment Entities: Applying the Consolidation Exception,” made narrow-scope clarifications of guidance. Specifically, the amendments clarify whether the exemption to present consolidated financial statements is available to a parent entity that is a subsidiary of an investment entity, which subsidiaries of an investment entity should be consolidated instead of being measured at fair value, and how an entity that is not an investment entity should apply the equity method of accounting for its investment in an associate or joint venture that is an investment entity. The amendments to IFRS 10, IFRS 12, and IAS 28 apply prospectively for annual periods beginning on or after January 1, 2016. Because Ahold is not an investment entity, nor does it have investments in an investment entity, these amendments will not have an effect on the future consolidated financial statements.

IFRS 9, “Financial Instruments,” addresses the classification, measurement and recognition of financial assets and financial liabilities. Based on Ahold’s current financial position, the Company anticipates that the application of IFRS 9 in the future may have an impact on amounts reported in respect of the Company’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until a detailed review has been completed. IFRS 9, as amended in July 2014, is effective for annual periods beginning on or after January 1, 2018.

IFRS 15, “Revenue from Contracts with Customers,” establishes a single comprehensive model for entities to use in accounting for revenue from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 “Revenue,” IAS 11 “Construction Contracts,” and the related Interpretations when it becomes effective for annual periods beginning on or after January 1, 2018. Under IFRS 15, an entity recognizes revenue when (or as) a performance obligation is satisfied, i.e., when “control” of the goods or services underlying the particular performance obligation is transferred to the customer.

 

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3 Significant accounting policies—(Continued)

 

More prescriptive guidance has been added in IFRS to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15. The Company is in the process of evaluating the full impact of IFRS 15, but to date has not identified issues that would have a significant effect on the future consolidated financial statements.

IFRS 16, “Leases,” eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. The Company anticipates that the application of IFRS 16 will have a significant effect on its reported assets and liabilities, and operating and financing expenses. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 16 until a detailed review has been completed. IFRS 16 is effective for annual periods beginning on or after January 1, 2019.

 

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3 Significant accounting policies—(Continued)

 

Amendments to IFRS 11, “Accounting for Acquisitions of Interests in Joint Operations,” provide guidance on how to account for the acquisition of a joint operation that constitutes a business as defined in IFRS 3 “Business Combinations.” Specifically, the amendments state that the relevant principles on accounting for business combinations in IFRS 3 and other standards should be applied. The amendments to IFRS 11 apply prospectively for annual periods beginning on or after January 1, 2016. Based on Ahold’s current financial position, the Company does not anticipate that the application of these amendments to IFRS 11 will have a significant effect on the future consolidated financial statements.

Amendments to IAS 12, “Income Taxes,” were made to address diversity in practice surrounding the recognition of deferred tax assets for unrealized losses on debt instruments measured at fair value, as well as provide additional guidance on how deductible temporary differences should be measured in situations when tax law limits the offsetting of certain types of losses against specific sources of taxable profits. The amendments to IAS 12 apply prospectively for annual periods beginning on or after January 1, 2017. The Company is in the process of evaluating the full impact of the amendments.

Amendments to IAS 16 and IAS 38, “Clarification of Acceptable Methods of Depreciation and Amortization,” prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment and introduce a rebuttable presumption that revenue is not an appropriate basis for amortization of an intangible asset. The amendments apply prospectively for annual periods beginning on or after January 1, 2016. Currently the Company uses the straight-line method for depreciation and amortization of property, plant and equipment, and intangible assets, respectively. The Company believes that the straight-line method is the most appropriate method to reflect consumption of economic benefits in the respective assets and accordingly does not anticipate that the application of these amendments will have a significant effect on the future consolidated financial statements.

Narrow-scope amendments to IAS 27, “Equity Method in Separate Financial Statements,” will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The amendments are effective for annual periods beginning on or after January 1, 2016, and are to be applied retrospectively. Based on Ahold’s current financial position, these amendments will not have an effect on the future consolidated financial statements.

Narrow-scope amendments to IFRS 10 and IAS 28, “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture,” clarified an inconsistency between these standards with regard to the sale or contribution of assets between an investor and its associate or joint venture. Following the amendments, a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. The Company has yet to assess the amendments’ full impact. The amendments’ effective date has been postponed by the IASB and a new effective date has not been identified.

Annual improvements to IFRSs 2012-2014 Cycle made a number of amendments to various IFRSs, which, based on Ahold’s current financial position, the Company anticipates will not have a significant effect on the future consolidated financial statements. The amendments are summarized as follows:

 

    The amendments to IFRS 5, “Non-current Assets Held for Sale and Discontinued Operations,” added specific guidance for cases in which an entity reclassifies an asset from held for sale to held for distribution to shareholders or vice versa and cases in which held-for-distribution accounting is discontinued.

 

    The amendments to IFRS 7, “Financial Instruments: Disclosures,” include a description of the term “continuing involvement” for the purpose of the transfer disclosures.

 

    The amendments to IAS 19, “Employee Benefits,” clarify that the high-quality corporate bonds used in estimating the discount rate for post-employment benefits should be denominated in the same currency as the benefits to be paid.

There are no other IFRSs or IFRIC interpretations that have been issued but are not yet effective that are expected to have a material effect on the future consolidated financial statements.

 

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4 Acquisitions

2015 acquisitions

A&P stores in the United States

On July 20, 2015, Ahold announced that it had entered into an agreement with The Great Atlantic & Pacific Tea Company to acquire 25 A&P stores in Greater New York. On October 8, 2015, all conditions had been met and Ahold commenced its purchase of 25 former A&P stores. The purchase and conversion of the stores were completed by mid-November 2015. The purchase price for all of the stores, inventory and other working capital items is $154 million (141 million). Goodwill recognized in the amount of $104 million (96 million), of which $59 million (54 million) will be deductible for tax purposes, represents expected synergies from the combination of operations.

From the date of acquisition, the stores contributed $140 million (129 million) to 2015 net sales and lowered net income by $11 million (10 million) in 2015. The impact excludes $4 million (3 million) in transaction costs related to the acquisition, which are included in general and administrative expenses. It is not practicable to provide the 2015 pro-forma effect on Ahold’s net sales and net income.

Jumbo

On August 14, 2012, Ahold announced that its Albert Heijn division had completed the transaction with Jumbo concerning 78 C1000 and four Jumbo stores for a total consideration of 290 million in cash. A net amount of 260 million was paid by January 3, 2016 (2015: credit 6 million, 2014: 2 million, 2013: credit 1 million and 2012: 265 million) in relation to the transferred stores. As of January 3, 2016, Ahold reached agreement with 75 franchisees, of which 71 stores had been converted and opened under the Albert Heijn banner and four stores had been divested upon acquisition. For the remaining seven stores, Ahold did not reach agreements with the franchisees and these stores were transferred back to Jumbo. In 2015 and 2014, Ahold recognized 9 million and 8 million, respectively, of impairment losses for the prepaid consideration (2013: nil). Goodwill recognized in the amount of 234 million by January 3, 2016 (2015: 60 million, 2014: 45 million, 2013: 76 million and 2012: 53 million), which will not be deductible for tax purposes, represents expected synergies from the combination of operations, as well as the ability to expand Ahold’s geographic reach.

The 17 stores that were converted to the Albert Heijn banner through 2015 have contributed 80 million to 2015 net sales and an insignificant amount to 2015 net income. It is not practicable to provide the 2015 pro-forma effect on Ahold’s net sales and net income.

Other 2015 acquisitions

During 2015, Ahold completed several minor store acquisitions for a combined purchase consideration of 15 million.

All acquisitions were accounted for using the acquisition method of accounting.

 

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4 Acquisitions (continued)

 

The allocation of the fair value of the net assets acquired and the goodwill arising from the acquisitions during 2015 are as follows:

 

million      A&P        Jumbo        Other        Total  

Property, plant and equipment

       134                     1           135   

Goodwill

       96           60           18           174   

Other intangible assets

       49                     2           51   

Reversal of other intangible assets

                 (66                  (66

Deferred tax asset

       26                     1           27   

Current assets

       6                     (3        3   

Non-current liabilities

       (153                  (4        (157

Current liabilities

       (17                            (17

Total purchase consideration

       141           (6        15           150   

5 Assets and liabilities held for sale and discontinued operations

Assets and liabilities held for sale

 

million    January 3,
2016
     December 28,
2014
 

Non-current assets and disposal groups held for sale

     3         7   

Total assets held for sale

     3         7   

The non-current assets and disposal groups held for sale at January 3, 2016 consist primarily of property, plant and equipment.

 

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5 Assets and liabilities held for sale and discontinued operations (continued)

 

Discontinued operations

Income (loss) from discontinued operations is specified as follows:

 

million      2015        2014        2013  

Slovakia

                 (2        (3

ICA

                           137   

Other1

                 (1        2   

Operating results from discontinued operations2

                 (3        136   

U.S. Foodservice

                 (194        (10

Slovakia

                 (1        (20

ICA

                           1,614   

BI-LO / Bruno’s

       1           1           3   

Other1

       1                     9   

Results on divestments3

       2           (194        1,596   

Income (loss) from discontinued operations, net of income taxes

       2           (197        1,732   

1 Includes adjustments to the results on various other discontinued operations and past divestments.

2 Operating results from discontinued operations are after net income tax benefits of nil, 2 million and 8 million in 2015, 2014 and 2013, respectively.

3 Results on divestments are after net income tax expense of 1 million and tax benefits of 28 million and 9 million in 2015, 2014 and 2013, respectively.

See Note 28 for the reconciliation between results on divestments of discontinued operations and cash received.

U.S. Foodservice

In connection with the settlement agreement Ahold signed to settle a class action relating to pricing practices of Ahold’s former subsidiary, in 2014 Ahold recorded a provision in the amount of 187 million net of income tax benefits of 28 million. Also included in results from divestments in 2014 were legal costs of 7 million (2013: 10 million).

Slovakia

On November 14, 2013, it was announced that Ahold had reached an agreement with Condorum regarding the sale of Ahold’s Slovakian business. Upon the sale agreement, Ahold Slovakia qualified as a held for sale and discontinued operation. On April 15, 2014, it was announced that the transaction was completed.

 

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5 Assets and liabilities held for sale and discontinued operations (continued)

 

The 2014 operating result of Ahold Slovakia as included in the operating results from discontinued operations was a loss of 2 million (2013: 3 million) as presented below.

 

million      2015        2014        2013  

Net sales

                 29           139   

Cost of sales

                 (22        (105

Gross profit

                 7           34   

Total operating expenses

                 (9        (44

Operating loss

                 (2        (10

Net financial expenses

                           (2

Loss before income taxes

                 (2        (12

Income taxes 1

                           9   

Operating results from discontinued operations, net of income taxes

                 (2        (3

1. Included in income tax benefits of 2013 was a 6 million deferred tax asset recognized for 2012 operating losses which was not recognized in the respective period as it was assessed to be not recoverable unless Ahold was to cease operating in Slovakia.

Upon the divestment in the first quarter of 2014, Ahold recorded a loss of 2 million, offset by a net tax benefit of 1 million as presented below. In 2013, in connection with this divestment Ahold had recorded a loss of 29 million, offset by a net tax benefit of 9 million. Included in the loss on divestment recorded in 2013 was impairment loss on the measurement to fair value less cost of disposal of 16 million and an onerous contract provision of 12 million.

 

million    2014  

Proceeds net of cost of disposal

     (34

Net liabilities divested

     21   

Use of provision on loss on divestment

     12   

Recognition of financial guarantee

     (1

Result on divestment before income taxes

     (2

Income taxes

     1   

Result on divestment of Slovakia

     (1

ICA

On February 10, 2013, Ahold reached a sale agreement with Hakon Invest regarding its 60% holding in ICA for proceeds of SEK 20 billion. Upon the sale agreement, Ahold’s investment in ICA was classified as a discontinued operation and the transaction was completed on March 27, 2013.

The 2013 operating results from discontinued operations included Ahold’s proportionate share in ICA’s operating results for the month of January 2013 of a 2 million loss, as well as a dividend of SEK 1.2 billion (142 million) received from ICA. The expected cash flows from the receipt of the dividend were subject to a cash flow hedge and, consequently, Ahold recognized 139 million of dividend income (142 million dividend receivable at the date of recognition less the effect of the cash flow hedge of 3 million).

 

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5 Assets and liabilities held for sale and discontinued operations (continued)

 

In 2013, Ahold recorded a gain of 1,614 million as a result on divestment of ICA as presented below:

 

million    2013  

Proceeds net of cost of disposal

     2,368   

Net assets divested

     (828

Results on divestment before recycling of currency exchange differences and other items

     1,540   

Currency exchange differences transferred from equity

     82   

Other items previously recognized in other comprehensive income

     (9

Results on divestments before income taxes

     1,613   

Income taxes

     1   

Result on divestment of ICA

     1,614   

BI-Lo / Bruno’s

Two former subsidiaries of Ahold, BI-LO, LLC and Bruno’s Supermarkets, LLC (BI-LO and Bruno’s), filed for protection under Chapter 11 of the U.S. Bankruptcy Code in 2009. Related to obligations under the lease guarantees, the Company recognized a provision, after tax, of 62 million in 2009. In 2010, the reorganized BI-LO exited bankruptcy protection. In 2015, Ahold recognized a reduction of 1 million (2014: a reduction of 1 million, 2013: a reduction of 3 million) in its provision, after tax, within results on divestments. For a description of the remaining provisions, see Note 34.

6 Segment reporting

Reportable segments

Ahold’s retail operations are presented in three reportable segments. In addition, Other retail, consisting of Ahold’s unconsolidated joint venture JMR, and Ahold’s Corporate Center are presented separately. In 2013, Ahold’s previously reported segment “Other Europe” has been renamed “Czech Republic” following the classification of Ahold’s business in Slovakia as a discontinued operation. The accounting policies used for the segments are the same as the accounting policies used for the consolidated financial statements as described in Note 3.

 

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6 Segment reporting (continued)

 

Operating companies in all reportable segments sell a wide range of perishable and non-perishable food and non-food consumer products.

 

Reportable segment    Operating segments included in the Reportable segment

Ahold USA

   Stop & Shop New England, Stop & Shop New York Metro, Giant Landover, Giant Carlisle and Peapod

The Netherlands

   Albert Heijn (including the Netherlands, Belgium and Germany), Etos, Gall & Gall and bol.com

Czech Republic

   Albert

 

Other    Included in Other
Other retail    Unconsolidated joint venture JMR (49%)

Corporate Center

   Corporate Center staff (the Netherlands, Switzerland and the United States)

Net sales

 

million      2015        2014        2013  

Ahold USA

       23,732           19,557           19,676   

The Netherlands

       12,699           11,696           11,494   

Czech Republic

       1,772           1,521           1,445   

Ahold group

       38,203           32,774           32,615   

Operating income

 

million      2015        2014        2013  

Ahold USA

       878           727           663   

The Netherlands

       557           584           612   

Czech Republic

       11           13           31   

Corporate Center

       (128        (74        (67

Ahold group

       1,318           1,250           1,239   

Additions to property, plant and equipment, investment property, and intangible assets (including assets acquired through business combinations)

 

million      2015        2014        2013  

Ahold USA

       770           390           519   

The Netherlands

       342           332           289   

Czech Republic (and Slovakia, prior to classification as discontinued operation)

       57           263           34   

Corporate Center

       3           21           1   

Ahold group

       1,172           1,006           843   

 

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6 Segment reporting (continued)

 

Depreciation and amortization of property, plant and equipment, investment property, and intangible assets

 

million      2015        2014        2013  

Ahold USA

       676           566           544   

The Netherlands

       272           269           245   

Czech Republic

       53           42           35   

Corporate Center

       3           2           1   

Ahold group

       1,004           879           825   

Net impairments of property, plant and equipment, investment property and intangible assets, and write-downs of intangible assets under development

 

million      2015        2014        2013  

Ahold USA

       20           10           83   

The Netherlands

       19           21           9   

Czech Republic

                           (1

Ahold group

       39           31           91   

Non-current assets (property, plant and equipment, investment property, and intangible assets)

 

million      2015        2014        2013  

Ahold USA

       6,129           5,419           5,005   

The Netherlands

       2,460           2,435           2,428   

Czech Republic

       615           598           382   

Corporate Center

       21           21           3   

Ahold group

       9,225           8,473           7,818   

Additional segment information

Segment results do not include significant non-cash items other than depreciation, amortization, write-downs, and impairment losses and reversals.

Segment information joint ventures – Other retail (JMR)

The information with respect to JMR is presented in Note 14.

 

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7 Net sales

 

million      2015        2014        2013  

Sales to retail customers

       33,693           28,882           29,005   

Sales to franchisees and franchise fees

       2,751           2,529           2,421   

Online sales

       1,646           1,267           1,086   

Other sales

       113           96           103   

Net sales

       38,203           32,774           32,615   

Net sales can be further analyzed as follows:

 

Percentage of net sales      2015        2014        2013  

Food: perishable

       46%           46%           46%   

Food: non-perishable

       34%           34%           34%   

Non-food

       12%           12%           12%   

Gasoline

       3%           4%           4%   

Pharmacy

       5%           4%           4%   

Net sales

       100%           100%           100%   

8 Expenses by nature

The aggregate of cost of sales and operating expenses is specified by nature as follows:

 

million      2015        2014        2013  

Cost of product

       26,597           23,009           22,912   

Labor costs

       5,704           4,637           4,705   

Other operational expenses

       2,938           2,473           2,334   

Depreciation and amortization

       1,004           879           825   

Write-down of intangible assets under development

                           8   

Rent expenses and income - net

       621           515           537   

Impairment losses and reversals - net

       39           31           83   

Gains on the sale of assets - net

       (18        (20        (28

Total expenses by nature

       36,885           31,524           31,376   

 

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9 Net financial expenses

 

million      2015        2014        2013  

Interest income

       5           6           7   

Interest expense

       (235        (212        (225

Net interest expense on defined benefit pension plans

       (14        (16        (24

Losses on foreign exchange

       (14        (15        (8

Fair value gains (losses) on financial instruments

       (2        7           (22

Other

       (5        (5        (19

Other financial expenses

 

      

 

(21

 

 

      

 

(13

 

 

      

 

(49

 

 

Net financial expenses

       (265        (235        (291

Interest income mainly relates to interest earned on cash and cash equivalents and short-term cash deposits and similar instruments.

Interest expense primarily relates to financial liabilities measured at amortized cost (primarily notes, finance lease liabilities, financing obligations and cumulative preferred financing shares) and interest accretions to provisions. At the beginning of 2015, 2014 and 2013, substantially all pension plans were in a liability position. Consequently, during all years, the net interest component of pension expense resulted in interest expense.

Foreign exchange results on financial assets and liabilities are presented as part of net financial expenses, within losses on foreign exchange. The losses on foreign exchange in 2015 and 2014 mainly resulted from the foreign exchange translation of the remaining GBP 250 million of the original GBP 500 million notes. Foreign exchange results arising from the purchase of goods for sale or goods and services consumed in Ahold’s operations are included in cost of sales or in the appropriate element of operating expenses, respectively. In 2015, the Company recorded a net exchange loss (including the impact of foreign exchange hedging instruments) of 1 million in operating income (2014: gain of 2 million and 2013: loss of 1 million).

In 2015, 2014 and 2013, fair value gains (losses) on financial instruments primarily resulted from the derivatives related to the remaining GBP 250 million notes (an interest rate and a U.S. dollar cross-currency swap), which do not qualify for hedge accounting treatment.

For more information on financial instruments, see Note 30.

“Other” included in “Other financial expenses” in 2013 was primarily comprised of 11 million relating to the change in discount rate used for a multi-employer pension plan withdrawal liability.

 

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10 Income taxes

Income taxes on continuing operations

The following table specifies the current and deferred tax components of income taxes on continuing operations in the income statement:

 

million      2015        2014        2013  

Current income taxes

              

Domestic taxes (the Netherlands)

       (125        (107        (103

Foreign taxes

              

United States

       (165        (95        (26

Europe – Other

       (1        (10        4   

Total current tax expense

       (291        (212        (125

Deferred income taxes

              

Domestic taxes (the Netherlands)

       24           (4        (18

Foreign taxes

              

United States

       50           (30        (18

Europe – Other

       (7        (2        8   

Total deferred tax expense

       67           (36        (28

Total income taxes on continuing operations

       (224        (248        (153

Effective income tax rate on continuing operations

Ahold’s effective tax rate in its consolidated income statement differed from the Netherlands’ statutory income tax rate of 25.0%. The following table reconciles the statutory income tax rate with the effective income tax rate in the consolidated income statement:

 

         2015               2014               2013   
        million           %              million           %              million           %   

Income before income taxes

       1,053                          1,015                          948              

Income tax expense at statutory tax rate

       (263)           25.0%             (254)           25.0%             (237)           25.0%   

Adjustments to arrive at effective income tax rate:

                                 

Rate differential (local rates versus the statutory rate of the Netherlands)

       (26)           2.5%             (23)           2.3%             (38)           4.0%   

Deferred tax income (expense) related to recognition of deferred tax assets-net

       29           (2.8)%             (6)           0.6%             40           (4.2)%   

Reserves, (non-) deductibles and discrete items

       36           (3.4)%               35           (3.5)%               82           (8.7)%   

Total income taxes

       (224)           21.3%               (248)           24.4%               (153)           16.1%   

 

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10 Income taxes (continued)

 

“Rate differential” indicates the effect of Ahold’s taxable income being generated and taxed in jurisdictions where tax rates differ from the statutory tax rate in the Netherlands. “Reserves, (non-) deductibles and discrete items” include one-time transactions. During 2013, a tax benefit of 37 million was recognized from movements in income tax contingency reserves.

Income taxes on discontinued operations

Current and deferred income tax related to discontinued operations amounted to a 1 million expense in 2015, 30 million benefit in 2014 and 17 million benefit in 2013 and has been included within the result from discontinued operations. The 2015 and 2014 current and deferred tax movements on discontinued operations are mainly related to the U.S. The 2013 current and deferred income tax benefit on discontinued operations is mainly related to Slovakia. For further information, see Notes 5 and 34.

 

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10 Income taxes (continued)

 

Deferred income tax

The significant components and annual movements of deferred income tax assets and liabilities as of January 3, 2016, December 28, 2014 and December 29, 2013 are as follows:

 

million    December 30,
2012
    Recognized in
income
statement
    Other     December 29,
2013
    Recognized in
income
statement
    Other     December 28,
2014
    Recognized in
income
statement
    Other     January 3,
2016
 

Leases and financings

     237        5        (19     223        1        37        261        (7     33        287   

Pensions and other post-employment benefits

     305        (7     (88     210        (27     35        218        (5     53        266   

Provisions

     114        20        21        155        (26     (11     118        (9     42        151   

Derivatives and loans

     24        5        (14     15        4        15        34               (3     31   

Interest

     57        (29     (1     27        (11     2        18        (6     2        14   

Other

     78        (39     (11     28        (5     10        33               (4     29   

Total gross deductible temporary differences

     815        (45     (112     658        (64     88        682        (27     123        778   

Unrecognized deductible temporary differences

     (56     3        49        (4                   (4                   (4

Total recognized deductible temporary differences

     759        (42     (63     654        (64     88        678        (27     123        774   

Tax losses and tax credits

     179        (15     (1     163        (4     113        272        (19     30        283   

Unrecognized tax losses and tax credits

     (44     43        (34     (35     (8     (72     (115     17        (13     (111

Total recognized tax losses and tax credits

     135        28        (35     128        (12     41        157        (2     17        172   

Total net deferred tax asset position

     894        (14     (98     782        (76     129        835        (29     140        946   

Property, plant and equipment and intangible assets

     (364     (14     (5     (383     49        (25     (359     92        (17     (284

Inventories

     (111     1        5        (105     (8     (12     (125     (2     (17     (144

Other

     (5     (1            (6     (1            (7     6        1          

Total deferred tax liabilities

     (480     (14            (494     40        (37     (491     96        (33     (428

Net deferred tax assets

     414        (28     (98     288        (36     92        344        67        107        518   

The column “Other” in the table above includes amounts recorded in equity, the effects of acquisitions, divestments and exchange rate differences, as well as reclassifications between deferred tax components and the application of tax losses and tax credits against current year income tax payables.

 

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10 Income taxes (continued)

 

Deferred income tax assets and liabilities are offset on the balance sheet when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to income taxes levied by the same fiscal authority. The deferred tax assets and liabilities are presented as non-current assets and liabilities on the balance sheet as follows:

 

million    January 3,
2016
    December 28,
2014
 

Deferred tax assets

     628        494   

Deferred tax liabilities

     (110     (150

Net deferred tax assets

     518        344   

As of January 3, 2016, Ahold had operating and capital loss carryforwards of a total nominal amount of 2,110 million, mainly expiring between 2019 and 2034 (December 28, 2014: 1,949 million and 2013: 1,239 million). The following table specifies the years in which Ahold’s operating and capital loss carryforwards and tax credits are scheduled to expire:

 

million    2016     2017     2018     2019     2020     2021-2025     2026-2030     After 2030     Does not
expire
    Total  

Operating and capital losses (nominal value)

     11        28        50        458        57        684        518        258        46        2,110   

Operating and capital losses (tax value)

     2        8        14        104        18        46        29        15        10        246   

Tax credits

     6        6        6        5        3        4                      7        37   

Tax losses and tax credits

     8        14        20        109        21        50        29        15        17        283   

Unrecognized tax losses and tax credits

     (4     (2     (3     (83     (1     (7     (5     (1     (5     (111

Total recognized tax losses and tax credits

     4        12        17        26        20        43        24        14        12        172   

Operating and capital loss carryforwards related to one jurisdiction may not be used to offset income taxes in other jurisdictions. Of the loss carryforwards, 1,629 million relates to U.S. state taxes, for which a weighted average tax rate of 5.63% applies.

The majority of the above mentioned deferred tax assets relate to tax jurisdictions in which Ahold has suffered a tax loss in the current or a preceding period. Significant judgment is required in determining whether deferred tax assets are realizable. Ahold determines this on the basis of expected taxable profits arising from the reversal of recognized deferred tax liabilities and on the basis of budgets, cash flow forecasts and impairment models. Where utilization is not considered probable, deferred tax assets are not recognized.

 

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10 Income taxes (continued)

 

Income taxes in equity and comprehensive income

Current and deferred income taxes recognized in and transferred from equity and comprehensive income are as follows:

 

million      2015        2014        2013  

Share-based compensation

       19           6           12   

Cash flow hedges

       (3        16           (15

Currency translation differences in foreign interests

       (1                  1   

Remeasurement of defined benefit pension plans

       11           21           (83

Total

       26           43           (85

 

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Table of Contents

11 Property, plant and equipment

 

        Buildings and land      Furnishings,
machinery
and equipment
     Other      Under
construction
     Total  
million      Stores      Other              

As of December 29, 2013

                                                       

At cost

       6,879         617         4,052         120         149         11,817   

Accumulated depreciation and impairment losses

       (2,987      (206      (2,853      (59              (6,105

Carrying amount

       3,892         411         1,199         61         149         5,712   

Year ended December 28, 2014

                   

Additions

       59         5         159         7         376         606   

Transfers from under construction

       191         26         215         4         (436        

Acquisitions through business combinations

       79                 45                         124   

Depreciation

       (369      (25      (345      (11              (750

Impairment losses

       (8              (6                      (14

Impairment reversals

       3                 1                         4   

Assets classified to held for sale or sold

       (11      (1      (2              (7      (21

Other movements

       (30      (2      3         2         (1      (28

Exchange rate differences

       371         28         101         6         11         517   

Closing carrying amount

       4,177         442         1,370         69         92         6,150   

As of December 28, 2014

                   

At cost

       7,810         703         4,510         143         92         13,258   

Accumulated depreciation and impairment losses

       (3,633      (261      (3,140      (74              (7,108

Carrying amount

       4,177         442         1,370         69         92         6,150   

Year ended January 3, 2016

                   

Additions

       82         32         187         19         428         748   

Transfers from under construction

       166         16         226         1         (409        

Acquisitions through business combinations

       116                 19                         135   

Depreciation

       (423      (32      (388      (14              (857

Impairment losses

       (15              (13                      (28

Impairment reversals

       1                 1                         2   

Assets classified to held for sale or sold

       (12              (4              (1      (17

Other movements

       23         (1      (29                      (7

Exchange rate differences

       394         32         112         8         5         551   

Closing carrying amount

       4,509         489         1,481         83         115         6,677   

As of January 3, 2016

                   

At cost

       8,799         810         5,192         176         115         15,092   

Accumulated depreciation and impairment losses

       (4,290      (321      (3,711      (93              (8,415

Carrying amount

       4,509         489         1,481         83         115         6,677   

 

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11 Property, plant and equipment (continued)

 

Buildings and land includes improvements to these assets. “Other” buildings and land mainly includes distribution centers and warehouses. “Other” property, plant and equipment mainly consists of trucks, trailers and other vehicles. Assets under construction mainly consists of stores.

In 2015, Ahold recognized net impairment losses of 26 million for property, plant and equipment (2014: 10 million and 2013: 69 million). These were mainly related to Ahold USA (2015: 17 million, 2014: 7 million and 2013: 66 million ) and the Netherlands (2015: 9 million, 2014: 3 million and 2013: 4 million) and were recognized for various operating and closed stores. In 2013, Stop & Shop closed six stores and three gas stations in the New Hampshire area, as announced on August 6, 2013. Ahold recognized $24 million (18 million) of impairments related to these stores based on the exit assumption.

The higher of the value in use or fair value less cost of disposal represents an asset’s recoverable amount. The value in use method involves estimating future cash flows. The present value of estimated future cash flows has been calculated using pre-tax discount rates ranging between 6.3% and 12.7% (2014: 6.8%-13.1%). Fair value represents the price that would be received to sell an asset in an orderly transaction between market participants and has generally been measured by using discounted cash flow projections based on the assets’ highest and best use from a market participants’ perspective. In 2015, the fair value less cost of disposal was the recoverable amount in the determination of 2 million of the net impairment losses. In 2014, there was no impairment loss recorded based on fair value less cost of disposal measurement. In 2013, the fair value less cost of disposal was the recoverable amount in determination of 15 million of the impairment losses.

The additions to property, plant and equipment include capitalized borrowing costs of 1 million (2014: 2 million). Generally, the capitalization rate used to determine the amount of capitalized borrowing costs is a weighted average of the interest rate applicable to the respective operating companies. This rate ranged between 2.3% and 3.8% (2014: 2.9%-4.2%).

Other movements mainly include transfers between asset classes and transfers to investment property.

The carrying amount of land and buildings includes amounts related to assets held under finance leases and financings of 987 million and 218 million, respectively (December 28, 2014: 843 million and 211 million). In addition, the carrying amount of machinery and equipment and other includes an amount of 6 million (December 28, 2014: 4 million) relating to assets held under finance leases. Ahold does not have legal title to these assets. Company-owned property, plant and equipment with a carrying amount of 48 million (December 28, 2014: 44 million) has been pledged as security for liabilities, mainly for loans.

 

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12 Investment property

 

million      2015        2014  

At the beginning of the year

         

At cost

       893           863   

Accumulated depreciation and impairment losses

       (333        (320

Carrying amount

       560           543   

Additions

       15           11   

Acquisitions through business combinations

                 5   

Depreciation

       (25        (25

Impairment losses and reversals - net

       (3        (9

Assets classified to held for sale or sold

       (20        (38

Transfers from property, plant and equipment and intangible assets - net

       4           28   

Exchange rate differences

       49           45   

Closing carrying amount

       580           560   

At the end of the year

         

At cost

       934           893   

Accumulated depreciation and impairment losses

       (354        (333

Carrying amount

       580           560   

A significant portion of Ahold’s investment property comprises shopping centers containing both an Ahold store and third-party retail units. The third-party retail units generate rental income, but are primarily of strategic importance to Ahold in its retail operations. Ahold recognizes the part of a shopping center leased to a third-party retailer as investment property, unless it represents an insignificant portion of the property.

In 2015, Ahold recognized net impairment losses of 3 million. These were related to Ahold USA (2 million) and the Netherlands (1 million).

The carrying amount of investment property includes an amount related to assets held under finance leases and financings of 25 million and 43 million (December 28, 2014: 29 million and 48 million), respectively. Ahold does not have legal title to these assets. Company-owned investment property with a carrying amount of 79 million (December 28, 2014: 75 million) has been pledged as security for liabilities, mainly for loans.

The fair value of investment property as of January 3, 2016, amounted to approximately 772 million (December 28, 2014: 744 million). Fair value represents the price that would be received to sell an asset in an orderly transaction between market participants and has generally been measured by using discounted cash flow projections based on the assets’ highest and best use from a market participants’ perspective. Approximately 60% of Ahold’s fair value measurements are categorized within Level 2. The most significant inputs into this valuation approach are observable market retail yields and tenant rents to calculate the fair value. The remaining fair value measurements which are categorized within Level 3 primarily include the fair value measurements based on the Company’s own valuation methods and the fair value for mixed-use properties and properties held for strategic purposes. For mixed-use properties and properties held for strategic purposes, Ahold cannot determine the fair value of the investment property reliably. In such cases, the fair value is assumed to be equal to the carrying amount.

 

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12 Investment property (continued)

 

Rental income from investment property included in the income statement in 2015 amounted to 70 million (2014: 66 million and 2013: 63 million). Direct operating expenses (including repairs and maintenance but excluding depreciation expense) arising from rental-income-generating and non-rent-generating investment property in 2015 amounted to 34 million (2014: 30 million and 2013: 30 million).

 

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Table of Contents

13 Intangible assets

 

million    Goodwill     Lease-related
intangibles
    Software     Customer
relationships
    Brand names      Other     Under
development
    Total  

As of December 29, 2013

                 

At cost

     841        239        680        119        86         320        70        2,355   

Accumulated amortization and impairment losses

     (4     (159     (490     (49             (90            (792

Carrying amount

     837        80        190        70        86         230        70        1,563   

Year ended December 28, 2014

                 

Additions

                   45        1                14        76        136   

Transfers from under development

                   71                       15        (86       

Acquisitions through business combinations

     164        2                              (42            124   

Amortization

            (9     (78     (5             (12            (104

Impairments and write-downs

     (4                                  (8            (12

Assets classified to held for sale or sold

                                         (2            (2

Exchange rate differences

     34        9        4        1                9        1        58   

Closing carrying amount

     1,031        82        232        67        86         204        61        1,763   

As of December 28, 2014

                 

At cost

     1,039        268        828        127        86         306        61        2,715   

Accumulated amortization and impairment losses

     (8     (186     (596     (60             (102            (952

Carrying amount

     1,031        82        232        67        86         204        61        1,763   

Year ended January 3, 2016

                 

Additions

                   37        2                14        62        115   

Transfers from under development

                   79                       7        (86       

Acquisitions through business combinations

     174        43               6                (64            159   

Amortization

            (11     (91     (6             (14            (122

Impairments

            (1                           (12            (13

Impairment reversals

                                         3               3   

Assets classified to held for sale or sold

     (6                                                (6

Other movements

     (3     2        1                       3               3   

Exchange rate differences

     40        9        6                       9        2        66   

Closing carrying amount

     1,236        124        264        69        86         150        39        1,968   

As of January 3, 2016

                 

At cost

     1,241        340        921        141        86         273        39        3,041   

Accumulated amortization and impairment losses

     (5     (216     (657     (72             (123            (1,073

Carrying amount

     1,236        124        264        69        86         150        39        1,968   

 

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Table of Contents

13 Intangible assets (continued)

 

Goodwill recognized on acquisitions in 2015 relates mainly to the acquisition of A&P stores in the United States (allocated to Stop & Shop New York Metro) and C1000 stores in the Netherlands (allocated to Albert Heijn) (see Note 4 for more details). Goodwill recognized on acquisitions in 2014 relates mainly to the acquisition of SPAR in the Czech Republic and the C1000 stores in the Netherlands.

Goodwill acquired in business combinations is allocated, at acquisition, to the cash-generating units (CGUs) or groups of CGUs expected to benefit from that business combination.

The carrying amounts of goodwill allocated to CGUs within Ahold’s reportable segments are as follows:

 

million          January 3,
2016
     December 28,
2014
 

Reportable segment

   Cash-generating unit      

Ahold USA

   Stop & Shop New England      16         15   
   Stop & Shop New York Metro      124         25   
   Giant Carlisle      264         235   
   Giant Landover      9         8   
   Peapod      24         21   

The Netherlands

   Albert Heijn      456         393   
   bol.com      201         201   
   Etos      8         8   
   Gall & Gall      1         1   

Czech Republic

   Czech Republic      133         124   

Ahold group

          1,236         1,031   

CGUs to which goodwill has been allocated are tested for impairment annually or more frequently if there are indications that a particular CGU might be impaired. The recoverable amount of each CGU is determined based on value in use calculations. Value in use is determined using discounted cash flow projections that generally cover a period of five years and are based on the financial plans approved by the Company’s management. Due to the expected continuation of high growth in the relevant online retail markets, we project cash flow for bol.com and Peapod over 10-year periods to better reflect the growth expectations in sales, profitability and cash generation after the first five-year projection period. The key assumptions for the value in use calculations relate to discount rate, sales growth and operating margin. The post-tax rates used to discount the projected cash flows reflect specific risks relating to relevant CGUs and are 6.2% for Ahold USA, 5.6% for The Netherlands, 10.0% for bol.com and 6.1% for the Czech Republic. The pre-tax discount rates are 10.3% for Ahold USA, 9.0% for Peapod, 7.4% for The Netherlands, 12.1% for bol.com and 7.4% for the Czech Republic. The value in use for the CGUs would be the same as that which would be derived from discounting pre-tax cash flows at these pre-tax discount rates. The sales growth rates and operating margins used to estimate future performance are based on past performance and our experience of growth rates and operating margins achievable in Ahold’s main markets. The average annual compound sales growth rates applied in the projected periods ranged between 13.6% and 14.2% for the CGUs of our online business and between 0.7% and 4.0% for the other CGUs. The average operating margins applied in the projected periods ranged between 0.8% and 2.1% for the CGUs of our online business and between 2.6% and 5.9% for the other CGUs. Growth rates used to extrapolate cash flows beyond the explicit forecast period are set such that the return on invested capital never exceeds the weighted average cost of capital of the CGUs.

 

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13 Intangible assets (continued)

 

Lease-related intangible assets consist primarily of favorable operating lease contracts acquired in business acquisitions. Customer relationships consist primarily of pharmacy scripts and customer lists recognized through the acquisition of bol.com in 2012. Brand names include the name “bol.com.” Ahold expects that bol.com will play an important role in its business strategy and believes there is currently no foreseeable limit to the period over which the brand is expected to generate net cash inflows. Therefore the brand is assessed to have an indefinite useful life. The asset is tested for impairment in accordance with the policies as stated in Note 3. “Other” mainly includes intangible assets related to location development rights, deed restrictions and similar assets. Included in “Other” is an intangible asset allocated to Stop & Shop New England with an indefinite useful life and a carrying value of 32 million (2014: 28 million). The useful life of this asset is assessed to be indefinite since it relates to the land portion of an owned location. Also included in 2014 was the prepaid purchase consideration for the transfer of C1000 stores of 74 million. In 2015 and 2014, Ahold recognized 9 million and 8 million, respectively, of impairment losses for the prepaid consideration. In 2015, the remaining amount was reallocated to the appropriate intangible assets (mainly goodwill) as agreements were reached with the franchisees.

Intangible assets under development relate mainly to software development. Amortization of software in 2014 included 10 million of accelerated amortization that resulted from a re-evaluation of the useful lives.

14 Investments in joint ventures and associates

In 1992, Ahold partnered with Jerónimo Martins, SGPS, S.A. in the joint venture JMR - Gestão de Empresas de Retalho, SGPS, S.A. (JMR). Ahold holds 49% of the shares in JMR and shares equal voting power on JMR’s board of directors with Jerónimo Martins, SGPS, S.A. JMR operates food retail stores in Portugal under the brand name Pingo Doce. JMR is a joint venture and is accounted for using the equity method. There is no quoted market price available.

Ahold is also a partner in various smaller joint arrangements and associates that are individually not material to the Group.

Changes in the carrying amount of Ahold’s interest in joint ventures and associates are as follows:

 

million    JMR
2015
    Other
2015
    Total
2015
    JMR
2014
    Other
2014
    Total
2014
 

Beginning of the year

     173        33        206        167        30        197   

Share in income (loss) of joint ventures

     24        (4     20        22        2        24   

Dividend

     (17     (4     (21     (17     (1     (18

Share of other comprehensive income (loss)

     1               1                        

Other changes in equity of joint ventures

            3        3        1               1   

Exchange rate differences

            3        3               2        2   

End of the year

     181        31        212        173        33        206   

Share in income (loss) from continuing operations for Ahold’s interests in all individually immaterial joint ventures was a loss of 4 million (2014: 2 million income and 2013: 1 million income) and nil for individually immaterial associates (2014 and 2013: nil).

 

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14 Investments in joint ventures and associates (continued)

 

Set out below is the summarized financial information for JMR (on a 100% basis).

 

million      JMR
2015
     JMR
2014
 

Summarized balance sheet

       

Current

       

Cash and cash equivalents

       51         74   

Other current assets

       336         312   

Total current assets

       387         386   

Financial liabilities (excluding trade payables)

       (20      (250

Other current liabilities

       (976      (879

Total current liabilities

       (996      (1,129

Non-current

       

Assets

       1,151         1,121   

Financial liabilities

       (150        

Other liabilities

       (29      (29

Total non-current liabilities

       (179      (29

Net assets

       363         349   

Net assets attributable to JMR

       369         354   

Net assets attributable to non-controlling interest

       (6      (5

 

million      JMR
2015
     JMR
2014
     JMR
2013
 

Summarized statement of comprehensive income

          

Net sales

       3,743         3,565         3,499   

Depreciation and amortization

       (99      (100      (102

Interest income

                       1   

Interest expense

       (9      (13      (23

Income tax expense

       (19      (19      (26

Income from continuing operations

       47         44         17   

Net income

       47         44         17   

Net income attributable to JMR

       48         46         18   

Net income (loss) attributable to non-controlling interest

       (1      (2      (1

Other comprehensive income

       1         1         1   

Total comprehensive income attributable to JMR

       49         47         19   

 

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14 Investments in joint ventures and associates (continued)

 

The information presented below represents a reconciliation of the summarized financial information presented above to the carrying amount of JMR.

 

million    JMR
2015
    JMR
2014
 

Opening net assets attributable to JMR

     354        341   

Net income

     48        46   

Other comprehensive income

     1        1   

Dividend

     (34     (34

Closing net assets attributable to JMR

     369        354   

Interest in joint venture

     49     49

Carrying value

     181        173   

Commitments and contingent liabilities in respect of joint ventures and associates

There are no contingent liabilities or significant restrictions relating to the Company’s interest in the joint ventures and associates. The commitments are presented in Note 34.

15 Other non-current financial assets

 

million    January 3,
2016
     December 28,
2014
 

Derivative financial instruments

     338         310   

Defined benefit asset

             5   

Reinsurance assets

     135         117   

Loans receivable

     31         36   

Other

     12         14   

Total other non-current financial assets

     516         482   

For more information on derivative financial instruments and fair values, see Note 30.

The defined benefit asset in 2014 represents defined benefit pension plans for which the fair value of plan assets exceeds the present value of the defined benefit obligations. For more information on defined benefit plans, see Note 23.

Of the non-current loans receivable, 14 million matures between one and five years and 17 million after five years (December 28, 2014: 18 million between one and five years and 18 million after five years). The current portion of loans receivable of 10 million is included in other receivables (December 28, 2014: 4 million).

Part of the self-insured risk is ceded under a reinsurance treaty, which is a pooling arrangement between unrelated companies. At the same time, Ahold assumes a share of the reinsurance treaty risks that is measured by Ahold’s participation percentage in the treaty. The participation percentage is the ratio of premium paid by Ahold to the total premium paid by all treaty members. In connection with this pooling arrangement, the Company recognizes reinsurance assets and reinsurance liabilities (see also Notes 18, 22 and 26) on its balance sheet. There were no significant gains or losses related to this pooling arrangement during 2015, 2014 or 2013.

 

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16 Inventories

 

million    January 3,
2016
     December 28,
2014
 

Finished products and merchandise inventories

     1,636         1,543   

Raw materials, packaging materials, technical supplies and other

     40         46   

Total inventories

     1,676         1,589   

In 2015, 793 million has been recognized as a write-off of inventories in the income statement (2014: 664 million and 2013: 644 million). The write-off of inventories is Ahold’s best estimate based on significant assumptions applied to certain products measured using the retail method.

17 Receivables

 

million    January 3,
2016
    December 28,
2014
 

Trade receivables

     416        390   

Vendor allowance receivables

     260        203   

Other receivables

     181        155   
     857        748   

Provision for impairment

     (20     (20

Total receivables

     837        728   

The receivable balances are presented net of accounts payable subject to an enforceable netting arrangement between the Company and the counterparty. The total effect of netting as of January 3, 2016, is 142 million (December 28, 2014: 136 million).

At January 3, 2016, the aging analysis of receivables was as follows:

 

                            Past due  
million      Total        Not past
due
       0–3
months
       3–6
months
       6–12
months
       > 12
months
 

Trade receivables

       416           329           57           7           3           20   

Vendor allowance receivables

       260           214           40           4           1           1   

Other receivables

       181           107           43           22           5           4   
       857           650           140           33           9           25   

Provision for impairment

       (20                  (2        (2        (2        (14

Total receivables

       837           650           138           31           7           11   

Receivables that were past due but not impaired relate to a number of independent customers for whom there is no recent history of default.

 

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17 Receivables (continued)

 

At December 28, 2014, the aging analysis of receivables was as follows:

 

                            Past due  
million      Total        Not past
due
       0–3
months
       3–6
months
       6–12
months
       > 12
months
 

Trade receivables

       390           288           60           11           14           17   

Vendor allowance receivables

       203           173           25           3           1           1   

Other receivables

       155           94           41           13           1           6   
       748           555           126           27           16           24   

Provision for impairment

       (20                  (2        (1        (2        (15

Total receivables

       728           555           124           26           14           9   

The concentration of credit risk with respect to receivables is limited, as the Company’s customer base and vendor base are large and unrelated. The Company does not hold any significant collateral on its receivables. Management believes there is no further credit risk provision required in excess of the normal individual and collective impairment, based on the aging analysis performed as of January 3, 2016. For more information about credit risk, see Note 30.

The changes in the provision for impairment were as follows:

 

million      2015        2014  

Beginning of the year

       (20        (19

Released / (charged) to income

       (11        (8

Used

       11           7   

End of the year

       (20        (20

 

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18 Other current financial assets

 

  million

 

  

 

January 3,

2016

    

 

December 28,

2014

 

 Short-term deposits and similar instruments

     528         262   

 Reinsurance assets – current portion (see Note 15)

     68         60   

 Other

             1   

 Total other current financial assets

     596         323   

As of January 3, 2016, short-term deposits and similar instruments included short-term investments with a maturity at acquisition of between three and twelve months.

Of the short-term deposits and similar instruments as of January 3, 2016, 10 million was restricted (December 28, 2014: 16 million). This primarily consisted of investments held for insurance purposes for U.S. workers’ compensation and general liability programs.

“Other” included in “Other financial expenses” in 2014 mainly consisted of the current portion of the derivative financial instruments. For more information on financial instruments and fair values, see Note 30.

19 Cash and cash equivalents

 

 

  million

 

  

 

January 3,

2016

    

 

December 28,

2014

 

 Cash in banks and cash equivalents

     1,363         1,281   

 Cash on hand

     463         343   

 Total cash and cash equivalents

     1,826         1,624   

Of the cash and cash equivalents as of January 3, 2016, 7 million was restricted (December 28, 2014: 9 million). This primarily consisted of cash held in escrow accounts mainly related to pending litigations and construction activities.

Ahold’s banking arrangements allow the Company to fund outstanding checks when presented to the bank for payment. This cash management practice may result in a net cash book overdraft position, which occurs when the total issued checks exceed available cash balances within the Company’s cash concentration structure. Such book overdrafts are classified in accounts payable and amounted to 216 million and 184 million as of January 3, 2016, and December 28, 2014, respectively. No right to offset with other bank balances exists for these book overdraft positions.

 

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20 Equity attributable to common shareholders

Shares and share capital

Authorized share capital comprises the following classes of shares as of January 3, 2016:

 

  million

 

  

 

2015

 

    

 

2014

 

 

 Common shares (2015: 1,171,000,000 at 0.01 par value each, and 2014: 1,700,000,000 of 0.01 par value each)

     12         17   

 Cumulative preferred shares (2015: 30,000 of 500 par value each, and 2014: 43,520 of 500 par value each)

     15         22   

 Total authorized share capital

     27         39   

In addition, Ahold has cumulative preferred financing shares outstanding. These cumulative preferred financing shares are considered debt under IFRS until the date that Ahold receives irrevocable notification from a holder of cumulative preferred financing shares to convert these shares into common shares. Upon this notification, the cumulative preferred financing shares are classified as a separate class of equity since they no longer meet the definition of a liability. For disclosures regarding Ahold’s cumulative preferred financing shares, see Note 22.

Common shares and additional paid-in capital

Changes in the number of common shares and the number of treasury shares were as follows:

 

     

 

Number of common 
shares issued and fully 
paid (x 1,000) 

 

   

 

Number of treasury 
shares (x 1,000) 

 

   

 

Number of common 
shares outstanding 
(x 1,000) 

 

 

 Balance as of December 30, 2012

     1,060,988        22,481        1,038,507   

 Share buyback

            61,009        (61,009

 Share-based payments

            (4,995     4,995   

 Balance as of December 29, 2013

     1,060,988        78,495        982,493   

 Share buyback

            92,485        (92,485

 Reverse stock split

     (81,615     (7,999     (73,616

 Cancelation of treasury shares

     (85,000     (85,000       

 Share-based payments

            (6,205     6,205   

 Balance as of December 28, 2014

     894,373        71,776        822,597   

 Share buyback

            8,795        (8,795

 Cancelation of treasury shares

     (60,000     (60,000       

 Share-based payments

            (4,669     4,669   

 Balance as of January 3, 2016

     834,373        15,902        818,471   

Dividends on common shares

On April 15, 2015, the General Meeting of Shareholders approved the dividend over 2014 of 0.48 per common share (396 million in the aggregate). This dividend was paid on April 30, 2015. The Management Board, with the approval of the Supervisory Board, proposes that a dividend of 0.52 per common share be paid in 2016 with respect to 2015. This dividend is subject to approval by the General Meeting of Shareholders and has not been included as a liability on the consolidated balance sheet as of January 3, 2016. The payment of this dividend will not have income tax consequences for the Company.

Share buyback and capital repayment and reverse stock split

On February 26, 2015, Ahold announced its decision to return 500 million to its shareholders by way of a share buyback program, to be completed over a 12-month period. Under this program, 8,795,407 of the Company’s own shares were repurchased in 2015. Shares were repurchased at an average price of 18.32 per share for a total amount of 161 million. As a result of the announcement that Ahold intends to merge with Delhaize, the share buyback program was terminated and approximately 1 billion will be returned to shareholders via a capital return and reverse stock split, subject to the conditions as explained in Note 35.

 

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20 Equity attributable to common shareholders (continued)

 

On December 12, 2014, Ahold completed its share buyback program initially announced as 500 million on February 28, 2013, and subsequently increased to 2 billion on June 4, 2013. Under this program, 153,494,149 of the Company’s own shares were repurchased in 2013 and 2014 (2013: 61,008,851 and 2014: 92,485,298) for a total consideration of 2 billion (2013: 768 million and 2014: 1,232 million), at an average price of 13.03 (2013: 12.58 and 2014: 13.32).

On January 21, 2014, a capital repayment and reverse stock split was approved at an Extraordinary General Meeting of Shareholders. On March 28, 2014, the reverse stock split became effective. Every 13 existing shares with a nominal value of 0.30 each were consolidated into 12 new shares with a nominal value of 0.01 each. The capital repayment of 1.14 per remaining share, 1,007 million in the aggregate (excluding transaction costs), took place on April 3, 2014. The capital reduction attributable to treasury shares, which was 109 million in the aggregate, is reported in Other reserves.

Of the total shares repurchased, 60,000,000 were canceled on July 7, 2015 and 85,000,000 were canceled on June 20, 2014.

Share-based payments

Share-based payments recognized in equity in the amount of 66 million (2014: 50 million and 2013: 61 million) relate to the 2015 GRO share-based compensation expenses of 47 million (2014: 43 million and 2013: 43 million) (see Note 32); the stock options exercised of nil (2014: 1 million and 2013: 6 million); and the current and deferred income taxes recognized in and transferred from equity relating to share-based compensation of 19 million (2014: 6 million and 2013: 12 million) (see Note 10).

Cumulative preferred shares

The Company’s Articles of Association provide for the possible issuance of cumulative preferred shares. The Company believes that its ability to issue this class of shares could prevent, or at least delay, an attempt by a potential bidder to make a hostile takeover bid. However, according to Dutch law, a response device is limited in time and therefore cannot permanently block a take-over of the company concerned. Instead, it aims to facilitate an orderly process in which the interests of the continuity of the company, its shareholders and other stakeholders are safeguarded in the best way possible. Moreover, outside the scope of a public offer, but also under other circumstances, the ability to issue this class of shares may safeguard the interests of the Company and all stakeholders in the Company and resist influences that might conflict with those interests by affecting the Company’s continuity, independence or identity. No cumulative preferred shares were outstanding as of January 3, 2016, or during 2015, 2014 and 2013.

In March 1989, the Company entered into an agreement with Stichting Ahold Continuïteit (SAC) as amended and restated in April 1994, March 1997, December 2001, and December 2003 (the Option Agreement). Pursuant to the Option Agreement, SAC was granted an option for no consideration to acquire cumulative preferred shares from the Company, from time to time until December 2018. The Company will submit a request to continue this arrangement to shareholders at the Extraordinary General Meeting of Shareholders on March 14, 2016. The Option Agreement entitles SAC to acquire cumulative preferred shares from the Company up to a total par value that is equal to the total par value of all issued and outstanding shares of Ahold’s share capital, excluding cumulative preferred shares, at the time of exercising the option. In case the authorized share capital of the Company is amended during the term of the option, the Option Agreement provides for a corresponding change of the total par value of cumulative preferred shares under option. The holders of the cumulative preferred shares are entitled to 50,000 votes per share and a cumulative dividend expressed as a percentage of the amount called-up and paid-in to purchase the cumulative preferred shares. The percentage to be applied is the sum of (1) the average basic refinancing transaction interest rate as set by the European Central Bank - measured by the number of days during which that rate was in force in the fiscal year over which the dividend is paid - plus 2.1%, and (2) the average interest surcharge rate - measured by the number of days during which that rate was in force in the fiscal year over which the dividend is paid - that would be charged by the largest credit institution in the Netherlands (based on the balance sheet total as of the close of the fiscal year immediately preceding the fiscal year over which the dividend is paid). The minimum percentage to be applied is 5.75%. Subject to limited exceptions, any potential transfer of cumulative preferred shares requires the approval of the Management Board. Cumulative preferred shares can only be issued in a registered form. The Company may stipulate that only 25% of the par value will be paid upon subscription to cumulative preferred shares until payment in full is later required by the Company. SAC would then only be entitled to a market-based interest return on its investment.

 

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20 Equity attributable to common shareholders (continued)

 

SAC is a foundation organized under the laws of the Netherlands. Its purpose under its articles is to safeguard the interests of the Company and all stakeholders in the Company and to resist, to the best of its ability, influences that might conflict with those interests by affecting the Company’s continuity, independence or identity. SAC seeks to realize its objectives by acquiring and holding cumulative preferred shares and by exercising the rights attached to these shares, including the voting rights. The SAC board has four members, who are appointed by the board of SAC itself.

If the board of SAC considers acquiring cumulative preferred shares or exercising voting rights on cumulative preferred shares, it will make an independent assessment and, pursuant to Dutch law, it must ensure that its actions are proportional and reasonable. If SAC acquires cumulative preferred shares, it will only hold them for a limited period of time. These principles are in line with Dutch law, which only allows response measures that are proportionate, reasonable and limited in time. In the case of liquidation, the SAC board will decide on the use of any remaining residual assets.

Legal reserves

In accordance with the Dutch Civil Code and statutory requirements in other countries, legal reserves have to be established in certain circumstances. Legal reserves are not available for distribution to the Company’s shareholders. The currency translation reserve, cash flow hedging reserve and other reserves include non-distributable amounts. Of the total equity as per January 3, 2016, of 5,622 million, an amount of 579 million is non-distributable (December 28, 2014: 219 million out of total equity of 4,844 million and December 29, 2013: 513 million out of total equity of 6,520 million).

The currency translation reserve, cash flow hedging reserve and legal reserve participations are legal reserves that are required by Dutch law. The legal reserve participations include the increases in net asset value of joint ventures and associates since their first inclusion, less any amounts that can be distributed without legal restrictions. The legal reserve participations are included in Other reserves. As at January 3, 2016, the balance of the legal reserve participations was 225 million (December 28, 2014: 210 million and December 29, 2013: 195 million).

If the currency translation reserve or the cash flow hedging reserve has a negative balance, distributions to the Company’s shareholders are restricted to the extent of the negative balance.

 

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21 Loans and credit facilities

The notes in the table below were issued by Ahold or one of its subsidiaries, the latter of which are guaranteed by Ahold unless otherwise noted. All related swap contracts have the same maturity as the underlying debt unless otherwise noted.

 

      Current
portion
within
1 year
     Non-current portion     Total
January 3,
2016
    Current
portion
within
1 year
     Non-current portion     Total
December 28,
2014
 
  million       Between
1 and 5 years
    After
5 years
         Between
1 and 5 years
    After
5 years
   
   

 Notional redemption amounts

                  

 GBP 500 notes 6.50%, due March 20171

             334               334                310               310   

 USD 94 indebtedness 7.82%, due January 20202

     9         26               35        8         31               39   

 USD 71 indebtedness 8.62%, due January 2025

             8        57        65                       58        58   

 USD 500 notes 6.875%, due May 2029

                    460        460                       411        411   

 JPY 33,000 notes LIBOR plus 1.5%, due May 20313

                    253        253                       225        225   

 Deferred financing costs

             (1     (2     (3             (1     (2     (3

 Total notes

     9         367        768        1,144        8         340        692        1,040   

 Other loans

             1        2        3                1        2        3   

 Financing obligations4

     22         102        273        397        20         92        275        387   

 Mortgages payable5

             2        7        9        2         2        6        10   

 Total loans

     31         472        1,050        1,553        30         435        975        1,440   

1 During 2005, Ahold bought back GBP 250 million of the notes. The remaining notional redemption amount of GBP 250 million (340 million) has been netted with 6 million as per January 3, 2016 (December 28, 2014: 9 million) representing an amount, amortized over the remaining terms of the notes, that relates to a hedging instrument that stopped qualifying for fair value hedge accounting. The remaining notional amount of the GBP 250 million was swapped to U.S. dollar (see Note 30 for additional information).

2 As of January 3, 2016, $57 million has been repaid since inception.

3 Notes were swapped to 299 million at an interest rate of 7.065% (see Note 30 for additional information related to the JPY cross-currency swap).

4 The weighted average interest rate for the financing obligations amounted to 7.6% in 2015 (2014: 7.7% and 2013: 7.9%).

5 Mortgages payable are collateralized by buildings and land. The weighted average interest rate for these mortgages payable amounted to 5.6% in 2015 (2014: 5.6% and 2013: 5.9%).

The fair values of financial instruments, corresponding derivatives, and the foreign exchange and interest rate risk management policies applied by Ahold are disclosed in Note 30.

The Company has a Euro Medium Term Note (EMTN) program that had an aggregate of 593 million of outstanding notes as of January 3, 2016. The notes issued under the program include the remaining outstanding balances of GBP 500 million and JPY 33,000 million notes, maturing in 2017 and 2031, respectively. The notes issued under the EMTN program contain customary restrictive covenants. During 2015, Ahold was in compliance with these covenants.

 

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21 Loans and credit facilities (continued)

 

Credit facilities

Ahold has access to an unsecured, committed, multi-currency and syndicated credit facility that was refinanced in June 2011. In February 2015, the facility was amended from 1.2 billion to 1.0 billion, and the maturity date was extended from 2018 to 2020, with the possibility of 12-month extensions in the first two years. In early 2016, Ahold requested to exercise the first of these options and extended the maturity date to February 2021. The credit facility may be used for working capital and for general corporate purposes and provides for the issuance of letters of credit to an aggregate maximum amount of $275 million (253 million). The 1.0 billion facility contains customary covenants and is subject to a financial covenant that requires Ahold, in case its corporate rating is lower than BBB / Baa2 from Standard & Poor’s and Moody’s respectively, not to exceed a maximum leverage ratio, as defined in the facility agreement of 4.0:1. During 2015, Ahold was in compliance with these covenants. As of January 3, 2016, there were no outstanding borrowings under the facility other than letters of credit to an aggregate amount of $18 million (16 million).

A bilateral facility for standby letter of credit was increased in 2015 to a total amount of $226 million (208 million), and was fully used per January 3, 2016.

Ahold also has access to various uncommitted credit facility lines serving working capital needs that, as of January 3, 2016, totaled 226 million. As of January 3, 2016, nothing was drawn under these credit facility lines.

22 Other non-current financial liabilities

 

  million    January 3,
2016
     December 28,
2014
 

 Finance lease liabilities

     1,290         1,125   

 Cumulative preferred financing shares

     497         497   

 Derivative financial instruments

     210         250   

 Reinsurance liabilities

     145         126   

 Other

     45         41   

 Total other non-current financial liabilities

     2,187         2,039   

For more information on derivative financial instruments and fair values (see Note 30).

The Company recognizes reinsurance liabilities on its balance sheet in connection with a pooling arrangement between unrelated companies (see Note 15).

Other mainly consists of a pre-tax liability for the discounted amount of the remaining settlement liability of $36 million (33 million) relating to a 2013 agreement with the New England Teamsters and Trucking Industry Pension Fund (NETTI) to settle Stop & Shop’s pension liabilities in the fund.

 

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22 Other non-current financial liabilities (continued)

 

Finance lease liabilities

Finance lease liabilities are payable as follows:

 

     January 3, 2016          December 28, 2014  
  million  

Future

minimum

lease

payments

   

Interest

portion

   

Present

value of

minimum

lease

payments

        

Future

minimum

lease

payments

   

Interest

portion

   

Present

value of

minimum

lease

payments

 

 Within one year

    209        99        110          179        91        88   

 Between one and five years

    790        306        484          681        284        397   

 After five years

    1,110        304        806            1,003        275        728   

 Total

                  2,109                      709                    1,400                          1,863                        650                      1,213   

 Current portion finance lease liabilities (see Note 26)

        110              88   

 Non-current portion finance lease liabilities

                    1,290                            1,125   

Finance lease liabilities are principally for buildings. Terms range primarily from 10 to 25 years and include renewal options if it is reasonably certain, at the inception of the leases, that they will be exercised. At the time of entering into a finance lease agreement, the commitment is recorded at its present value using the interest rate implicit in the lease, if this is practicable to determine; if not, the operating company-specific interest rate applicable for long-term borrowings is used. As of January 3, 2016, the finance lease liabilities are recorded at their present value at a weighted average interest rate of 7.7% (December 28, 2014: 7.7%).

Certain store leases provide for contingent additional rentals based on a percentage of sales and consumer price indices. Substantially all of the store leases have renewal options for additional terms. None of Ahold’s leases impose restrictions on Ahold’s ability to pay dividends, incur additional debt or enter into additional leasing arrangements.

During 2015, interest expense on finance lease liabilities was 100 million (2014: 90 million and 2013: 95 million), of which nil related to discontinued operations (2014: nil and 2013: 2 million ). Total future minimum sublease income expected to be received under non-cancelable subleases as of January 3, 2016, is 111 million (December 28, 2014: 107 million and December 29, 2013: 116 million). The total contingent rent expense recognized during the year on finance leases was 1 million expense (2014: 2 million income and 2013: 4 million expense).

 

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22 Other non-current financial liabilities (continued)

 

Cumulative preferred financing shares

 

     

Number

of shares

(x 1,000)

      million  

 Issued cumulative preferred financing shares (0.01 par value each)

     268,415         3   

 Authorized cumulative preferred financing shares (0.01 par value each)

             329,000                                      3   

    

                 
  million    January 3,
2016
    

December 28,

2014

 

 Paid-in capital issued cumulative preferred financing shares

     3         3   

 Additional paid-in capital cumulative preferred financing shares

     494         494   

 Balance as of year-end

     497         497   

The cumulative preferred financing shares were issued in four tranches. Dividends are paid on each preferred financing share at a percentage (financing dividend percentage) that differs per tranche. When a period of 10 years has lapsed after the issue date of a tranche, and every 10 years thereafter (reset date), the financing dividend percentage is reset. The current financing dividend percentage is 5.93% per year for the shares issued in June 1996, 6.08% per year for the shares issued in August 1998, 3.85% per year for the shares issued in October 2000, and 3.35% per year for the shares issued in December 2003. The nominal value plus additional paid-in capital per tranche is 71 million (June 1996 tranche), 46 million (August 1998 tranche), 320 million (October 2000 tranche) and 60 million (December 2003 tranche); in the aggregate 497 million. This amount is presented under “other non-current financial liabilities” in the consolidated balance sheet as these cumulative preferred financing shares are considered debt under IFRS.

The total number of votes that can be exercised by the cumulative preferred financing shares is approximately 75 million. This represents approximately 8% of the total number of votes that can be cast (this total being calculated as the sum of the outstanding cumulative preferred financing shares and the outstanding common shares).

The cumulative preferred financing shares are convertible into common shares. The conversion conditions have been set so as to avoid any transfer of value from the common shares to the cumulative preferred financing shares. The maximum number of common shares to be received upon conversion of all outstanding cumulative preferred financing shares is approximately 90 million. The conversion features are similar for all tranches. Conversion is allowed for all shares in one tranche held by one investor but not for fractions of tranches held by one investor. Upon conversion, the holders of (depositary receipts of) cumulative preferred financing shares will receive a number of common shares that is calculated by dividing the value of the cumulative preferred financing shares on the day before the conversion date by the average share price of Ahold common shares on the five trading days preceding the notification date, on the notification date, and on the four trading days following the notification date. The value of the cumulative preferred financing shares will be considered, for this purpose, to be equal to the lower of the nominal value plus the additional paid-in capital of the cumulative preferred financing shares (par value) or to the present value of the remaining preferred dividends until the first reset date plus the present value of the par value at the first reset date.

Subject to the approval of the General Meeting of Shareholders, the Company can redeem the cumulative preferred financing shares of a certain tranche, but not fractions of a tranche. Redemption of a tranche is subject to the approval of the holders of depositary receipts of that tranche, unless all (remaining) cumulative preferred financing shares are redeemed. Redemption takes place at the higher of the par value or the present value of the remaining preferred dividends plus the present value of the par value at the reset date.

 

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23 Pensions and other post-employment benefits

Defined benefit plans

Ahold has a number of defined benefit pension plans covering a substantial number of employees, former employees and retirees in the Netherlands and the United States. Generally, the plans are career average or final pay defined benefit plans. In addition, Ahold provides additional pension benefits for certain company executives and life insurance and medical care benefits for certain retired employees meeting age and service requirements at its U.S. subsidiaries, all of which the Company funds as claims are incurred.

The pension plans expose the Company to actuarial risks such as: longevity risk, interest rate risk, currency risk, salary risk and investment risk. Longevity risk relates to the mortality assumptions used to value the defined benefit obligation, where an increase in participants’ life expectancies will increase a plan’s liability. Interest rate risk relates to the discount rate used to value the defined benefit obligation, where a decrease in the discount rate will increase a plan’s liability; however this will be partially offset by an increase in the return on a plan’s investments in debt instruments. The pension plans may mitigate interest rate risk by entering into interest rate swap contracts. Currency risk relates to the fact that a plan holds investments that may not be denominated in the same currency as the plan’s obligations. The pension plans may mitigate currency risk by purchasing forward currency instruments. Salary risk relates to salary increase assumptions used to value the defined benefit obligation, where an increase will result in a higher plan liability. See below for more details on the Company’s asset-liability matching strategy employed to manage its investment risk.

Net assets relating to one plan are not offset against net liabilities of another plan, resulting in the following presentation of the pension and other post-employment benefits on the consolidated balance sheet: