Chili's 2012 Annual Report Download - page 47

stock performance to the S&P 500 composite index of us and our peer group as inputs to the simulation model.
These historical returns could differ significantly in the future and as a result, the fair value assigned to the
performance shares could vary significantly to the final payout. We believe the Monte Carlo simulation model
provides the best evidence of fair value at the grant date and is an appropriate technique for valuing share-based
awards. We recognize compensation expense for only the portion of share-based awards that are expected to vest.
Therefore, we apply estimated forfeiture rates that are derived from our historical forfeitures of similar awards.
Income Taxes
In determining net income for financial statement purposes, we make certain estimates and judgments in the
calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise
from temporary differences between the tax and financial statement recognition of revenue and expense. When
considered necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more
likely than not to be recognized. We use an estimate of our annual effective tax rate at each interim period based
on the facts and circumstances available at that time while the actual effective tax rate is calculated at year-end.
We record a liability for unrecognized tax benefits resulting from tax positions taken, or expected to be
taken, in an income tax return. We recognize any interest and penalties related to unrecognized tax benefits in
income tax expense. Significant judgment is required in assessing, among other things, the timing and amounts
of deductible and taxable items. Tax reserves are evaluated and adjusted as appropriate, while taking into account
the progress of audits of various taxing jurisdictions.
In addition to the risks related to the effective tax rate described above, the effective tax rate reflected in
forward-looking statements is based on current tax law. Any significant changes in the tax laws could affect these
estimates.
Property and Equipment
Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets.
The useful lives of the assets are based upon our expectations for the period of time that the asset will be used to
generate revenues. We periodically review the assets for changes in circumstances, which may impact their
useful lives.
Impairment of Long-Lived Assets
We review the carrying amount of property and equipment semi-annually or when events or circumstances
indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an
impairment charge for the excess of the carrying amount over the fair value. We determine fair value based on
projected discounted future operating cash flows of the restaurants over their remaining service life using a risk
adjusted discount rate that is commensurate with the risk inherent in our current business model. This process
requires the use of estimates and assumptions, which are subject to a high degree of judgment.
Impairment of Goodwill
We assess the recoverability of goodwill related to our restaurant brands on an annual basis or more often if
circumstances or events indicate impairment may exist. We consider our restaurants brands, Chili’s and
Maggiano’s, to be both our operating segments and reporting units. The impairment test is a two-step process.
Step one includes comparing the fair value of our reporting units to their carrying value. If the fair value of the
reporting unit exceeds the carrying value, then the goodwill balance is not impaired and no further evaluation is
required. If the carrying value of the reporting unit exceeds its fair value, impairment may exist and performing
step two is necessary to determine the impairment loss. The amount of impairment would be determined by
performing a hypothetical analysis resulting in an implied goodwill value by performing a fair value allocation as
if the unit were being acquired in a business combination. This implied value would be compared to the carrying
value to determine the amount of impairment loss, if any.
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