Chili's 2015 Annual Report Download - page 56

required to assist the franchisee in opening a new franchise restaurant, which is generally upon the opening of
such restaurant. Fees received for development arrangements are recognized as income upon payment of the fees.
Continuing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when
earned.
Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as revenue when the
gift card is redeemed by the holder. Breakage income represents the value associated with the portion of gift
cards sold that will most likely never be redeemed. Based on our historical gift card redemption patterns and
considering our gift cards have no expiration dates or dormancy fees, we can reasonably estimate the amount of
gift card balances for which redemption is remote and record breakage income based on this estimate. We
recognize breakage income within franchise and other revenues in the consolidated statements of comprehensive
income. We update our estimate of our breakage rate periodically and, if necessary, adjust the deferred revenue
balance accordingly.
(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 and are valued at the lower of cost or market, using the
first-in, first-out or “FIFO” method.
(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 certain 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
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