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Summary Of Significant Accounting Policies

12 Months Ended

Sep. 24, 2011

Summary Of Significant Accounting Policies [Abstract]

Summary Of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Business—Ingles Markets, Incorporated ("Ingles" or the "Company"), is a leading supermarket chain in the southeast United States, operates 203 supermarkets in Georgia (74), North Carolina (69), South Carolina (36), Tennessee (21), Virginia (2) and Alabama (1).

Principles of Consolidation—The consolidated financial statements include the accounts of Ingles Markets, Incorporated and its wholly-owned subsidiaries, Sky King, Inc., Ingles Markets Investments, Inc., Milkco, Inc., Shopping Center Financing, LLC, and Shopping Center Financing II, LLC. All significant inter-company balances and transactions are eliminated in consolidation.

Fiscal Year—The Company's fiscal year ends on the last Saturday in September. Fiscal years 2011, 2010 and 2009 consisted of 52 weeks each.

New Accounting Pronouncements—In May 2011 the Financial Accounting Standards Board ("FASB") issued ASU 2011-04 "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS". The amendments in this update are the result of the work of the FASB and the IASB to develop common requirements for measuring fair value and for disclosing information about fair value measurements. The amendment becomes effective for interim and annual periods beginning after December 15, 2011, which will be the first quarter of fiscal 2012 for the Company. The Company is currently assessing the future impact of this ASU to its Consolidated Financial Statements.

There were no new accounting standards adopted in the fiscal years ended September 24, 2011, September 25, 2010, or September 26, 2009.

Cash Equivalents—All highly liquid investments with a maturity of three months or less when purchased are considered cash. Interest income of $0.1 million, $0.8 million, and $0.3 million for fiscal years 2011, 2010 and 2009, respectively, is included in the line item "Other income, net" on the Consolidated Statements of Income.

Financial Instruments—The Company at times has short-term investments and certificates of deposit with maturities of three months or less when purchased that are included in cash. At September 24, 2011 the Company had no such investments. The Company's policy is to invest its excess cash either in money market accounts, reverse repurchase agreements or in certificates of deposit. Money market accounts and certificates of deposit are not secured; reverse repurchase agreements are secured by government obligations. At September 24, 2011 demand deposits of approximately $7.6 million in eight banks exceed the $250,000 FDIC insurance limit per bank.

Allowance for Doubtful Accounts—Accounts receivable are primarily from vendor allowances, customer charges and pharmacy insurance company reimbursements. Accounts receivable are stated net of an allowance for uncollectible accounts, which is determined through analysis of the aging of accounts receivable at the date of the consolidated financial statements and assessments of the collectability based upon historical collection activity adjusted for current conditions.

Inventories—Substantially all of the Company's inventory consists of finished goods. Warehouse inventories are valued at the lower of average cost or market. Store inventories are valued using the retail method under which inventories at cost (and the resulting gross margins) are determined by applying a calculated cost-to-retail ratio to the retail value of inventories. As an integral part of valuing inventory at cost, management makes certain judgments and estimates for standard gross margins, allowances for vendor consideration, markdowns and shrinkage. Warehousing and distribution costs are not included in the valuation of inventories. The Company reviews its judgments and estimates regularly and makes adjustments where facts and circumstances dictate. Period to period adjustments for vendor allowances, markdowns and shrinkage have historically not been significant.

Property, Equipment and Depreciation—Property and equipment are stated at cost and depreciated over the estimated useful lives by the straight-line method. Buildings are generally depreciated over 30 years. Store, office and warehouse equipment is generally depreciated over three to 10 years. Transportation equipment is generally depreciated over three to five years. Leasehold improvements are depreciated over the shorter of the subject lease term or the useful life of the asset, generally from three to 30 years. Depreciation expense totaled $80.4 million, $78.0 million and $76.2 million for fiscal years 2011, 2010 and 2009, respectively.

Asset Impairments—The Company accounts for the impairment of long-lived assets in accordance with FASB ASC Topic 360. For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal associates. Estimates of future cash flows and expected sales prices are judgments based upon the Company's experience and knowledge of local operations and cash flows that are projected for several years into the future. These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital spending decisions and inflation. The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether any indicators of impairment have occurred.

Restricted Investments—Restricted investments consist of money market deposits and United States Treasury securities purchased with the proceeds of the Recovery Zone Bonds issued in December 2010. These investments are held in a trust account, mature no later than September 2012 and may be liquidated as the Company incurs approved costs to build the Project. These assets are classified as available-for-sale and are stated at market value.

Capitalized Loan and Leasehold Costs—Other assets include capitalized loan and leasehold costs of $12.2 million (net of $21.2 million accumulated amortization) and $12.5 million (net of $16.6 million accumulated amortization) at September 24, 2011 and September 25, 2010, respectively. These costs are amortized over the life of the underlying debt instrument or lease at approximately $4.5 million per year. During the year ended September 26, 2009 the Company accelerated the amortization of $3.4 million of capitalized loan costs in conjunction with the early repayment of certain outstanding debt. This amount is included in the line item "Loss on early extinguishment of debt" on the Consolidated Statements of Income.

Self-Insurance—The Company is self-insured for workers' compensation, general liability and group medical and dental benefits. Risks and uncertainties are associated with self-insurance; however, the Company has limited its exposure by maintaining excess liability coverage of $750,000 per occurrence for workers' compensation, $500,000 for general liability, and $325,000 per covered person for medical care benefits for a policy year. Self-insurance liabilities are established based on claims filed and estimates of claims incurred but not reported. The estimates are based on data provided by the respective claims administrators, which is then applied to appropriate actuarial methods. These estimates can fluctuate if historical trends are not predictive of the future. The Company's self insurance reserves totaled $24.8 million and $22.3 million for employee group insurance, workers' compensation insurance and general liability insurance at September 24, 2011 and September 25, 2010, respectively. The Company is required in certain cases to obtain letters of credit to support its self-insured status. At fiscal year end 2011, the Company's self-insured liabilities were supported by $8.2 million of undrawn letters of credit which expire between November 2011 and October 2012. The Company carries casualty insurance only on those properties where it is required to do so. The Company has elected to self-insure its other properties.

While researching alternative methods to calculate retained claim liability for our self-insured workers compensation insurance program, we discovered errors in the application of actuarial methods used to estimate the obligation for future payments resulting from claims due to past events. These errors primarily related to the Company's selection of loss development factors and the application of such factors to the population of claims. The impact of these prior period misstatements to our consolidated financial statements resulted in the understatement of workers compensation expense with a corresponding understatement of workers compensation self insurance liabilities over multiple fiscal years through September 25, 2010.

In accordance with applicable accounting guidance, an adjustment to the financial statements for each individual prior period presented is required to reflect the correction of the period-specific effects of the change, if material. Based on our evaluation of relevant quantitative and qualitative factors, we determined the identified corrections are immaterial to the Company's individual prior period consolidated financial statements, however, the cumulative correction of the prior period errors would be material to our current year Consolidated Statements of Income. Consequently, we have restated the accompanying Consolidated Balance Sheet as of September 25, 2010 from amounts previously reported as reflected in the table below. We have also restated the September 25, 2010, September 26, 2009 and September 27, 2008 balances of retained earnings by $3.0 million, $3.9 million and $3.0 million, respectively, presented in the Consolidated Statement of Changes in Stockholders' Equity appearing herein. The restated balances differ from amounts previously reported to correct the prior period adjustments by the understatement of workers compensation self insurance liabilities with a corresponding reduction to retained earnings.

The impact of these adjustments is not material to our 2010 and 2009 statement of cash flows as the impact to individual line items within operating activities is not material and there was no net impact to cash provided by operating activities, cash used in investing activities and cash provided by financing activities. However, we have restated the 2010 and 2009 Consolidated Statements of Cash Flows to reflect changes to individual line items within operating activities.

We have also adjusted the Consolidated Statements of Income for the fiscal years ended September 25, 2010 and September 26, 2009 to reflect the additional workers compensation expense.

The tables below summarize the effect of the restatement of previously reported consolidated financial statements for the fiscal years ended September 25, 2010 and September 26, 2009 (in thousands, except per share data):


		As of September 25, 2010
		As Previously Reported				Adjustment				As Restated
Consolidated Balance Sheet
Deferred income taxes (current)		$	6,070			$	3,058			$	9,128
Other current assets			16,545				3,058				19,603
Total assets			1,529,300				3,058				1,532,358
Self-insurance liabilities			14,523				7,817				22,340
Accrued expenses and current portion of other long-term liabilities			77,282				7,817				85,099
Retained earnings			295,023				(4,759	)			290,264
Total stockholders' equity			413,840				(4,759	)			409,081
Total liabilities and stockholders' equity			1,529,300				3,058				1,532,358


		Year Ended September 25, 2010												Year Ended September 26, 2009
		As Previously Reported				Adjustment				As Restated				As Previously Reported				Adjustment				As Restated
Consolidated Statements of Income
Operating and administrative expenses		$	653,674			$	1,518			$	655,192			$	632,410			$	1,521			$	633,931
Income from operations			110,965				(1,518	)			109,446				113,223				(1,521	)			111,702
Income before income taxes			50,335				(1,518	)			48,817				46,234				(1,521	)			44,713
Deferred income tax expense			5,745				(621	)			5,124				16,803				(626	)			16,177
Net income			31,739				(897	)			30,842				28,828				(895	)			27,934
Earnings per share:
Class A Common Stock
Basic			1.35				(0.03	)			1.32				1.23				(0.04	)			1.19
Diluted			1.30				(0.04	)			1.26				1.18				(0.04	)			1.14
Class B Common Stock
Class A			1.23				(0.03	)			1.20				1.12				(0.04	)			1.08
Class B			1.23				(0.03	)			1.20				1.12				(0.04	)			1.08

Closed Store Accrual—For closed properties under long-term lease agreements, a liability is recognized and expensed based on the difference between the present value of any remaining liability under the lease and the present value of the estimated market rate at which the Company expects to be able to sublease the properties, in accordance with FASB ASC Topic 420. The Company's estimates of market rates are based on its experience, knowledge and third-party advice or market data. If the real estate and leasing markets change, sublease recovery could vary significantly from the recoveries originally assumed, resulting in a material change in the Company's recorded liability. The closed store accrual is included in the line item "Accrued expenses and current portion of other long-term liabilities" on the Consolidated Balance Sheets.

Income Taxes—The Company accounts for income taxes under FASB ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates. The Company accounts for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return.

The Company had gross unrecognized tax benefits of $149,500, $149,500 and $344,000 as of September 24, 2011, September 25, 2010 and September 26, 2009, respectively. These benefits, if recognized, would affect the effective tax rate. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

The Company files income tax returns with federal and various state jurisdictions. With few exceptions, the Company is no longer subject to state income tax examinations by tax authorities for the years before 2005. Additionally, the Internal Revenue Service ("IRS") has completed its examination of the Company's U.S. Federal income tax returns filed through fiscal year 2008. As of September 24, 2011 certain of the Company's tax returns for fiscal years 2006-2009 are under examination by certain state tax authorities. Examinations may challenge certain of the Company's tax positions. Actual results could materially differ from these estimates and could significantly affect the effective tax rate and cash flows in the future years.

Under ASC 740-10 "Accounting for Uncertainty in Income Taxes", the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the "more likely than not" threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not expected to be realized.

The Company's continuing practice is to recognize interest and penalties related to uncertain tax positions and related matters in income tax expense. As of September 24, 2011, the Company had approximately $55,000 accrued for interest and penalties.

Pre-Opening Costs—Costs associated with the opening of new stores are expensed when incurred.

Per-Share Amounts—The Company calculates earnings per share using the two-class method in accordance with FASB ASC Topic 260.

Advertising—The Company expenses advertising as incurred. Advertising and promotion expenses, net of vendor allowances, totaled $13.9 million, $14.8 million and $17.0 million for fiscal years 2011, 2010 and 2009, respectively.

Use of Estimates—The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. Such estimates include the allowance for doubtful accounts, various inventory reserves, realizability of deferred tax assets, and self-insurance reserves.

Cost of Goods Sold—In addition to the direct product cost, cost of goods sold for the grocery segment includes inbound freight charges and costs of the Company's distribution network. The milk processing segment is a manufacturing process. Therefore, cost of goods sold include direct product and production costs, inbound freight, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and other costs of distribution.

Operating and Administrative Expenses—Operating and administrative expenses include costs incurred for store and administrative labor, occupancy, depreciation, insurance and general administration.

Revenue Recognition—The Company recognizes revenues from grocery sales at the point of sale to its customers. Sales taxes collected from customers are not included in reported revenues. Discounts provided to customers by the Company at the point of sale, including discounts provided in connection with loyalty cards, are recognized as a reduction in sales as the products are sold. Product returns are not significant.

The Company recognizes fluid dairy revenues at the time the risk of loss shifts to the customer pursuant to our terms of sale. Therefore, approximately 70% of fluid dairy revenues are recognized when the product is picked up by the customer at our facility. The remaining fluid dairy revenues are recognized when the product is received at the customer's facility upon delivery via transportation arranged by the Company.

Rental income, including contingent rentals, is recognized on the accrual basis. Upfront consideration paid by either the Company as lessor or by the lessee is recognized as an adjustment to net rental income using the straight line method over the term of the lease.

Vendor Allowances—The Company receives funds for a variety of merchandising activities from the many vendors whose products the Company buys for resale in its stores. These incentives and allowances are primarily comprised of volume or purchase based incentives, advertising allowances, slotting fees, and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs incurred by the Company for stocking, advertising, promoting and selling the vendors' products. These allowances generally relate to short term arrangements with vendors, often relating to a period of a month or less, and are negotiated on a purchase-by-purchase or transaction-by-transaction basis. Whenever possible, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a component of item cost in inventory and recognized in merchandise costs when the item is sold. Due to system constraints and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the vendor consideration received is sold. Vendor allowances applied as a reduction of merchandise costs totaled $109.9 million, $105.2 million, and $101.0 million for the fiscal years ended September 24, 2011, September 25, 2010 and September 26, 2009, respectively. Vendor advertising allowances that represent a reimbursement of specific identifiable incremental costs of advertising the vendor's specific products are recorded as a reduction to the related expense in the period that the related expense is incurred. Vendor advertising allowances recorded as a reduction of advertising expense totaled $13.1 million, $13.0 million, and $14.3 million for the fiscal years ended September 24, 2011, September 25, 2010 and September 26, 2009, respectively.

If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising as well as the volume and frequency of its product advertising, which could increase or decrease its expenditures.

Similarly, the Company is not able to assess the impact of vendor advertising allowances on the creation of additional revenue; as such allowances do not directly generate revenue for its stores.

The entire disclosure for all significant accounting policies of the reporting entity.

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