Chili's 2002 Annual Report Download - page 38

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Impairment of Long-Lived Assets
The Company reviews property and equipment for impairment when events or circumstances indicate it
might be impaired. The Company tests impairment using historical cash flows and other relevant facts and
circumstances as the primary basis for its estimates of future cash flows. This process requires the use of
estimates and assumptions which are subject to a high degree of judgment. In addition, at least annually the
Company assesses the recoverability of goodwill and other intangible assets related to its restaurant concepts.
These impairment tests require the Company to estimate fair values of its restaurant concepts by making
assumptions regarding future cash flows and other factors. If these assumptions change in the future, the
Company may be required to record impairment charges for these assets.
Financial Instruments
The Company enters into interest rate swaps to manage fluctuations in interest expense and to maintain the
value of fixed-rate debt. The fair value of these swaps is estimated using widely accepted valuation methods. The
valuation of derivatives involves considerable judgment, including estimates of future interest rate curves.
Changes in those estimates may materially affect the value of the Company’s derivatives.
Self-Insurance
The Company is self-insured for certain losses related to general liability and workers’ compensation. The
Company maintains stop loss coverage with third party insurers to limit its total exposure. The self-insurance
liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated
liability is not discounted and is established based upon analysis of historical data and actuarial estimates, and is
reviewed by the Company on a quarterly basis to ensure that the liability is appropriate. If actual trends,
including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (‘‘FASB’’) issued SFAS No. 144, ‘‘Accounting for
the Impairment or Disposal of Long-Lived Assets.’’ This statement supersedes SFAS No. 121, ‘‘Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of’’ and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, ‘‘Reporting the Results of Operations—
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions.’’ SFAS No. 144 retains the fundamental provisions of SFAS No. 121, but
eliminates the requirement to allocate goodwill to long-lived assets to be tested for impairment. This statement
also requires discontinued operations to be carried at the lower of cost or fair value less costs to sell and
broadens the presentation of discontinued operations to include a component of an entity rather than a segment
of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years, with early application encouraged. The Company will adopt SFAS No. 144 in the first
quarter of fiscal 2003 and does not expect the adoption of this statement to have a material impact on its results
of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, ‘‘Accounting for Costs Associated with Exit or Disposal
Activities.’’ SFAS No. 146 supersedes Emerging Issues Task Force (‘‘EITF’’) No. 94-3, ‘‘Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in
a Restructuring).’’ SFAS No. 146 eliminates the provisions of EITF No. 94-3 that required a liability to be
recognized for certain exit or disposal activities at the date an entity committed to an exit plan. SFAS No. 146
requires a liability for costs associated with an exit or disposal activity to be recognized when the liability is
incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The
Company does not expect the adoption of this statement to have a material impact on its results of operations or
financial position.
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