Chili's 2012 Annual Report Download - page 55

(e) Fair Value Measurements
Fair value is defined as the price that we would receive to sell an asset or pay to transfer a liability in an
orderly transaction between market participants on the measurement date. In determining fair value, the
accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:
• Level 1—inputs are quoted prices in active markets for identical assets or liabilities.
• Level 2—inputs are observable for the asset or liability, either directly or indirectly, including quoted prices
in active markets for similar assets or liabilities.
• Level 3—inputs are unobservable and reflect our own assumptions.
(f) Cash and Cash Equivalents
Our policy is to invest cash in excess of operating requirements in income-producing investments. Income-
producing investments with original maturities of three months or less are reflected as cash equivalents.
(g) Accounts Receivable
Accounts receivable, net of the allowance for doubtful accounts, represents their estimated net realizable value.
Provisions for doubtful accounts are recorded based on management’s judgment regarding our ability to collect as
well as the age of the receivables. Accounts receivable are written off when they are deemed uncollectible.
(h) Inventories
Inventories consist of food, beverages and supplies. During fiscal 2012, we began the implementation of a
new restaurant information system for all company-owned Chili’s restaurants. Inventories located at the
converted restaurants are valued using the first-in, first-out or “FIFO” method. All other inventories are stated at
the lower of cost (weighted average cost method) or market. The change in inventory valuation methods did not
have a material impact on our financial statements.
(i) Property and Equipment
Property and equipment is stated at cost. Buildings and leasehold improvements are depreciated 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 10 years. Routine repair
and maintenance costs are expensed when incurred. Major replacements and improvements are capitalized.
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. Impairment
charges are included in other gains and charges in the consolidated statements of income.
(j) Operating Leases
Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the
lease term, including cancelable option periods where failure to exercise such options would result in an
economic penalty such that the renewal appears reasonably assured. The straight-line rent calculation and rent
expense includes the rent holiday period, which is the period of time between taking control of a leased site and
the rent commencement date. Contingent rents are generally amounts due as a result of sales in excess of
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