Note 1 – Summary of Significant Accounting Policies and Basis of Presentation

SpartanNash Company was formerly known as Spartan Stores, Inc. (“Spartan Stores”), which began doing business under the assumed name of “SpartanNash Company” upon completion of the merger with Nash-Finch Company (“Nash-Finch”) on November 19, 2013. The formal name change to SpartanNash Company was approved and became effective after the annual shareholders meeting on May 28, 2014. The accompanying audited consolidated financial statements (the “financial statements”) include the accounts of SpartanNash Company and its subsidiaries (“SpartanNash” or “the Company”).

Fiscal Year: The Company’s fiscal year end is the Saturday nearest to December 31. The fiscal year end was changed from the last Saturday in March in connection with the merger with Nash-Finch, effective beginning with the transition period ended December 28, 2013. As a result of this change, the transition period ended December 28, 2013 was a 39-week period beginning March 31, 2013. Fiscal years ended January 2, 2016 and January 3, 2015 consisted of 52 weeks and 53 weeks, respectively. Beginning with fiscal 2014, the Company’s interim quarters consist of 12 weeks except for the first quarter, which consists of 16 weeks. For fiscal 2014, the fourth quarter consisted of 13 weeks as a result of the 53 week fiscal year.

Principles of Consolidation: The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United State of America (“GAAP”) and include the accounts of SpartanNash Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods might differ from those estimates.

Revenue Recognition: The Company recognizes revenue when the sales price is fixed or determinable, collectability is reasonably assured, and the customer takes possession of the merchandise. The Military segment recognizes revenues upon the delivery of the product to the commissary or commissaries designated by the Defense Commissary Agency (DeCA), or in the case of overseas commissaries, when the product is delivered to the port designated by DeCA, which is when DeCA takes possession of the merchandise and bears the responsibility for shipping the product to the commissary or overseas warehouse. Revenues from consignment sales are included in the Company’s reported sales on a net basis. The Food Distribution segment recognizes revenues when products are delivered or ancillary services are provided. Sales and excise taxes are excluded from revenue. The Retail segment recognizes revenues from the sale of products at the point of sale. Based upon the nature of the products the Company sells, its customers have limited rights of return which are immaterial. Discounts provided by the Company to customers at the time of sale are recognized as a reduction in sales as the products are sold. The Company does not recognize a sale when it awards customer loyalty points or sells gift cards and gift certificates; rather, a sale is recognized when the customer loyalty points, gift card or gift certificate are redeemed to purchase product. Sales taxes collected from customers are remitted to the appropriate taxing jurisdictions and are excluded from sales revenue as the Company considers itself a pass-through conduit for collecting and remitting sales taxes.

Cost of Sales: Cost of sales is the cost of inventory sold during the period, including purchase costs, freight, distribution costs, physical inventory adjustments, markdowns and promotional allowances. Vendor allowances and credits that relate to the Company’s buying and merchandising activities consist primarily of promotional allowances, which are generally allowances on purchased quantities and, to a lesser extent, slotting allowances, which are billed to vendors for the Company’s merchandising costs such as setting up warehouse infrastructure. Vendor allowances are recognized as a reduction in cost of sales when the related product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms. The distribution segments include shipping and handling costs in the selling, general and administrative section of operating expenses on the consolidated statement of earnings.

Cash and Cash Equivalents: Cash and cash equivalents consist of cash and highly liquid investments with an original maturity of three months or less at the date of purchase.

Accounts and Notes Receivable: Accounts and notes receivable are shown net of allowances for credit losses of $6.8 million and $5.5 million as of January 2, 2016 and January 3, 2015, respectively. The Company evaluates the adequacy of its allowances by analyzing the aging of receivables, customer financial condition, historical collection experience, the value of collateral and other economic and industry factors. Actual collections may differ from historical experience, and if economic, business or customer conditions deteriorate significantly, adjustments to these reserves may be required. When the Company becomes aware of factors that indicate a change in a specific customer’s ability to meet its financial obligations, the Company records a specific reserve for credit losses. Operating results include bad debt expense of $2.1 million, $3.0 million and $1.3 million for fiscal years ended January 2, 2016 and January 3, 2015 and for the 39-week period ended December 28, 2013, respectively.

Inventory Valuation: Inventories are valued at the lower of cost or market. Approximately 88.2% and 93.7% of the Company’s inventories were valued on the last-in, first-out (LIFO) method at January 2, 2016 and January 3, 2015, respectively. If replacement cost had been used, inventories would have been $49.5 million and $50.7 million higher at January 2, 2016 and January 3, 2015, respectively. The replacement cost method utilizes the most current unit purchase cost to calculate the value of inventories. During fiscal years ended January 2, 2016 and January 3, 2015 and for the 39-week period ended December 28, 2013, certain inventory quantities were reduced. The reductions resulted in liquidation of LIFO inventory carried at lower costs prevailing in prior years, the effect of which decreased the LIFO provision in fiscal years ended January 2, 2016 and January 3, 2015 and the 39-week period ended December 28, 2013 by $0.6 million, $0.8 million and $0.1 million, respectively. The Company accounts for its Military and Food Distribution inventory using a perpetual system and utilizes the retail inventory method (“RIM”) to value inventory for center store products in the Retail segment. Under RIM, inventory is stated at cost with cost of sales and gross margin calculated by applying a cost ratio to the retail value of inventories. Fresh, pharmacy and fuel products are accounted for at cost in the Retail segment. The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. The Company records allowances for inventory shortages based on the results of recent physical counts to provide for estimated shortages from the last physical count to the financial statement date.

Goodwill and Intangible Assets: Goodwill represents the excess purchase price over the fair value of tangible net assets acquired in business combinations after amounts have been allocated to intangible assets. Goodwill is not amortized, but is reviewed for impairment during the last quarter of each year, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, using a discounted cash flow model and comparable market values of each reporting segment. Measuring the fair value of reporting units is a Level 3 measurement under the fair value hierarchy. See Note 7 for a discussion of levels.

Intangible assets primarily consist of trade names, favorable lease agreements, pharmacy prescription lists, customer relationships, franchise agreements and fees, non-compete agreements and liquor licenses. The following assets are amortized on a straight-line basis over the period of time in which their expected benefits will be realized, which are as follows: favorable leases (related lease terms), prescription lists and customer relationships (period of expected benefit), non-compete agreements and franchise fees (length of agreements), and trade names with definite lives (expected life of the assets). Indefinite-lived trade names are not amortized but are tested at least annually for impairment, and liquor licenses are also not amortized as they have indefinite lives. Intangible assets are included in “Other Assets, net” in the consolidated balance sheets.

Property and Equipment: Property and equipment are recorded at cost. Expenditures which improve or extend the life of the respective assets are capitalized, whereas expenditures for normal repairs and maintenance are charged to operations as incurred. Depreciation expense on land improvements, buildings and improvements, and equipment is computed using the straight-line method as follows:

Land improvements			15 years
Buildings and improvements			15 to 40 years
Equipment			3 to 15 years

Property under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the remaining terms of the leases or the estimated useful lives of the assets. Internal use software is included in property and equipment and amounted to $20.3 million and $17.7 million as of January 2, 2016 and January 3, 2015, respectively.

Impairment of Long-Lived Assets: The Company reviews and evaluates long-lived assets for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. When the undiscounted expected future cash flows are not sufficient to recover an asset’s carrying amount, the fair value is compared to the carrying value to determine the impairment loss to be recorded. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value, less the cost to sell. Fair values are determined by independent appraisals or expected sales prices based upon market participant data developed by third party professionals or by internal licensed real estate professionals. Estimates of future cash flows and expected sales prices are judgments based upon the Company’s experience and knowledge of operations. These estimates project cash flows several years into the future and are affected by changes in the economy, real estate market conditions and inflation.

Reserves for Closed Properties: The Company records reserves for closed properties that are subject to long-term lease commitments based upon the future minimum lease payments and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated sublease rentals that could be reasonably expected to be obtained for the property. Future cash flows are based on contractual lease terms and knowledge of the geographic area in which the closed site is located. These estimates are subject to multiple factors, including inflation, ability to sublease the property and other economic conditions. Internally developed estimates of sublease rentals are based upon the geographic areas in which the properties are located, the results of previous efforts to sublease similar properties, and the current economic environment. The reserved expenses are paid over the remaining lease terms, which range from one to 12 years. Adjustments to closed property reserves primarily relate to changes in subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known. The current portion of the future lease obligations of stores is included in “Other accrued expenses,” and the long-term portion is included in “Other long-term liabilities” in the consolidated balance sheets.

Debt Issuance Costs: Debt issuance costs are amortized over the term of the related financing agreement and are included in “Other assets, net” in the consolidated balance sheets.

Insurance Reserves: SpartanNash is primarily self-insured for workers’ compensation, general liability, automobile liability and healthcare costs. Self-insurance liabilities are recorded based on claims filed and an estimate of claims incurred but not yet reported. Workers’ compensation, general liability and automobile liabilities are actuarially estimated based on available historical information on an undiscounted basis. The Company has purchased stop-loss coverage to limit its exposure to any significant exposure on a per claim basis. On a per claim basis, the Company’s exposure is up to $0.5 million for workers’ compensation, general liability and automobile liability and $0.5 million for healthcare per covered life per year. Any projection of losses concerning workers’ compensation, general liability, automobile liability and healthcare costs is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, changing regulations, legal interpretations, benefit level changes and claim settlement patterns. Although the Company’s estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, such changes could have a material impact on future claim costs and currently recorded liabilities.

A summary of changes in the Company’s self-insurance liability is as follows:

(In thousands)	January 2, 2016			January 3, 2015			December 28, 2013
Balance at beginning of period	$	19,413		$	22,454		$	7,167
Balance assumed in merger		—			—			13,248
Expenses		43,851			53,297			25,291
Claim payments, net of employee contributions		(48,798	)		(56,338	)		(23,252	)
Balance at end of period	$	14,466		$	19,413		$	22,454

The current portion of the self-insurance liability was $8.2 million and $13.3 million as of January 2, 2016 and January 3, 2015, respectively, and is included in “Other accrued expenses” in the consolidated balance sheets. The long-term portion was $6.2 million and $6.1 million as of January 2, 2016 and January 3, 2015, respectively, and is included in “Other long-term liabilities” in the consolidated balance sheets.

Income Taxes: Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred and other tax assets and liabilities.

Earnings per share: Earnings per share (“EPS”) are computed using the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends and their respective participation rights in undistributed earnings. Participating securities include non-vested shares of restricted stock in which the participants have non-forfeitable rights to dividends during the performance period. Diluted EPS includes the effects of stock options.

The following table sets forth the computation of basic and diluted EPS for continuing operations:

	January 2, 2016			January 3, 2015			December 28, 2013
(In thousands, except per share amounts)	(52 Weeks)			(53 Weeks)			(39 Weeks)
Numerator:
Earnings from continuing operations	$	63,166		$	59,120		$	1,229
Adjustment for earnings attributable to participating securities		(1,098	)		(1,015	)		(26	)
Earnings from continuing operations used in calculating earnings per share	$	62,068		$	58,105		$	1,203
Denominator:
Weighted average shares outstanding, including participating securities		37,612			37,641			24,137
Adjustment for participating securities		(654	)		(646	)		(519	)
Shares used in calculating basic earnings per share		36,958			36,995			23,618
Effect of dilutive stock options		106			69			92
Shares used in calculating diluted earnings per share		37,064			37,064			23,710
Basic earnings per share from continuing operations	$	1.68		$	1.57		$	0.05
Diluted earnings per share from continuing operations	$	1.67		$	1.57		$	0.05

Weighted average shares issuable upon the exercise of stock options that were not included in the EPS calculations because they were anti-dilutive were 322,914 and 334,172 for fiscal year ended January 3, 2015 and the 39-week period ended December 28, 2013, respectively. There were no anti-dilutive stock options in fiscal year ended January 2, 2016.

Stock-Based Compensation: All share-based payments to associates are recognized in the consolidated financial statements as compensation cost based on the fair value on the date of grant. The grant date closing price per share of SpartanNash stock is used to estimate the fair value of restricted stock awards and restricted stock units. The value of the portion of awards expected to vest is recognized as expense over the requisite service period.

Shareholders’ Equity: The Company’s restated articles of incorporation provide that the Board of Directors may at any time, and from time to time, provide for the issuance of up to 10 million shares of preferred stock in one or more series, each with such designations as determined by the Board of Directors. At January 2, 2016 and January 3, 2015, there were no shares of preferred stock outstanding.

Advertising Costs: The Company’s advertising costs are expensed as incurred and are included in Selling, general and administrative expenses. Advertising expenses were $47.7 million, $41.1 million and $15.3 million for fiscal years ended January 2, 2016 and January 3, 2015 and for the 39-week period ended December 28, 2013, respectively.

Accumulated Other Comprehensive Income (Loss): The Company reports comprehensive income (loss) that includes net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are not included in net earnings, such as minimum pension and other postretirement liability adjustments, but rather are recorded directly in the consolidated statements of shareholders’ equity. These amounts are also presented in the consolidated statements of comprehensive income. As of January 2, 2016 and January 3, 2015, the accumulated other comprehensive loss relates to the pension and postretirement liability.

Discontinued operations: Certain of the Company’s Retail and Food Distribution operations have been recorded as discontinued operations. Results of discontinued operations are excluded from the accompanying notes to the consolidated financial statements for all periods presented, unless otherwise noted. Results of discontinued operations reported on the consolidated statements of earnings are reported net of tax.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” which provides guidance for lease accounting. The new guidance contained in the ASU stipulates that lessees will need to recognize a right-of-use asset and a lease liability for substantially all leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. Treatment in the consolidated statements of earnings will be similar to the current treatment of operating and capital leases. The new guidance is effective on a modified retrospective basis for the Company in the first quarter of its fiscal year ending December 28, 2019. The Company is currently in the process of evaluating the impact of adoption of this standard on its consolidated financial statements.

In November 2015, FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted ASU 2015-17 in the fourth quarter of fiscal 2015 on a retrospective basis for all periods presented. Adoption of this standard resulted in the reclassification of $22.5 million of “Deferred income taxes” from Current liabilities to Long-term liabilities as of January 3, 2015.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the same reporting period in which the adjustments are determined. The Company adopted ASU 2015-16 in the third quarter of fiscal 2015. Adoption of this standard did not have a material impact on the consolidated financial statements as the Company has not recorded any significant measurement-period adjustments in fiscal 2015.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements." ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issuance costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement. The new guidance is effective on a retrospective basis for the Company in the first quarter of its fiscal year ending December 31, 2016. Adoption of these standards in fiscal 2016 will retroactively decrease Other long-term assets and Long-term debt. As of January 2, 2016, such amount was approximately $8.2 million.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The new guidance contained in the ASU affects any reporting organization that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, “Deferral of the Effective Date,” which results in the guidance being effective for the Company in the first quarter of its fiscal year ending December 29, 2018. Adoption is allowed by either the full retrospective or modified retrospective approach. The Company is currently in the process of evaluating the impact of adoption of this standard on its consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 changed the criteria for reporting discontinued operations and modified related disclosure requirements. The Company adopted ASU 2014-08 in the first quarter of fiscal 2015. Adoption of this standard did not have a material impact on the consolidated financial statements.