Chili's 2002 Annual Report Download - page 47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
adjustments to interest expense and restaurant expenses, respectively. Cash flows related to derivative
transactions are included in operating activities. See Notes 6 and 7 for additional discussion of debt-related
agreements and derivative financial instruments and hedging activities.
(d) Inventories
Inventories, which consist of food, beverages, and supplies, are stated at the lower of cost (weighted average
cost method) or market.
(e) Property and Equipment
Buildings and leasehold improvements are amortized using the straight-line method over the lesser of the
life of the lease, including renewal options, or the estimated useful lives of the assets, which range from 5 to
20 years. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives
of the assets, which range from 3 to 8 years.
The Company evaluates property and equipment held and used in the business for impairment whenever
events or changes in circumstances indicate that the carrying amount of a restaurant’s assets may not be
recoverable. An impairment is determined by comparing estimated undiscounted future operating cash flows for
a restaurant to the carrying amount of its assets. If an impairment exists, the amount of impairment is measured
as the excess of the carrying amount over the estimated discounted future operating cash flows of the asset and
the expected proceeds upon sale of the asset. Assets held for sale are reported at the lower of carrying amount or
fair value less costs to sell.
(f) Capitalized Interest
Interest costs capitalized during the construction period of restaurants were approximately $4.5 million,
$2.8 million, and $3.2 million during fiscal 2002, 2001, and 2000, respectively.
(g) Advertising
Advertising costs are expensed as incurred. Advertising costs were $116.6 million, $95.4 million, and
$80.7 million in fiscal 2002, 2001, and 2000, respectively, and are included in restaurant expenses in the
consolidated statements of income.
(h) Goodwill and Other Intangible Assets
Intangible assets include both goodwill and identifiable intangibles arising from the allocation of the
purchase prices of assets acquired. Goodwill represents the residual purchase price after allocation to all other
identifiable net assets acquired. Other intangibles consist mainly of reacquired development rights and
intellectual property.
The Company adopted SFAS No. 142, ‘‘Goodwill and Other Intangible Assets,’’ effective June 28, 2001.
SFAS No. 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Intangible
assets with lives restricted by contractual, legal, or other means will continue to be amortized over their useful
lives. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or
more frequently if events or changes in circumstances indicate that the asset might be impaired. SFAS No. 142
requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its
carrying value to determine whether an indication of impairment exists. If an impairment is indicated, then the
fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and
liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business
combination. The amount of impairment for goodwill and other intangible assets is measured as the excess of its
carrying value over its fair value. No such impairment losses were recorded upon the initial adoption of
SFAS 142. Prior to the adoption of SFAS No. 142, goodwill was being amortized on a straight-line basis over 30 to
40 years.
Intangible assets subject to amortization under SFAS No. 142 consist primarily of intellectual property
rights. Amortization expense is calculated using the straight-line method over their estimated useful lives of 15 to
25 years. Intangible assets not subject to amortization consist primarily of reacquired development rights. See
Note 3 for additional disclosures related to goodwill and other intangibles.
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