Chipotle 2005 Annual Report Download - page 56

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Chipotle Mexican Grill, Inc.
Notes to Financial Statements (Continued)
(in thousands, except per share data)
Rent
Rent expense for the Company’s leases, which generally have escalating rentals over the term of
the lease, is recorded on a straight-line basis over the lease term. The lease term begins when the
Company has the right to control the use of the property, which is typically before rent payments are
due under the lease. The difference between the rent expense and rent paid is recorded as deferred
rent in the consolidated balance sheet. Rent expense for the period prior to store opening is capitalized
and included in leasehold improvements in the consolidated balance sheet. Rent capitalized during the
pre-opening period was $4,229, $3,626 and $2,489 for the years ended December 31, 2005, 2004 and
2003, respectively. Tenant incentives used to fund leasehold improvements are recorded in deferred rent
and amortized as reductions of rent expense over the term of the lease.
Additionally, certain of the Company’s operating leases contain clauses that provide additional
contingent rent based on a percentage of sales greater than certain specified target amounts. The
Company recognizes contingent rent expense prior to the achievement of the specified target that
triggers contingent rent, provided the achievement of that target is considered probable.
Foreign Currency Translation
Currently, the Company has no operations outside the United States, but has created an
international subsidiary to hold international trademarks. The Company’s international entity uses its
local currency as the functional currency. Assets and liabilities are translated at exchange rates in effect
as of the balance sheet date. Income and expense accounts are translated at the average monthly
exchange rates during the year. Resulting translation adjustments are recorded as a separate component
of accumulated other comprehensive income in shareholders’ equity.
2. Recently Issued Accounting Standards
In October 2005, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB Staff Position
No. SFAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (‘‘FSP 13-1’’). FSP
13-1 requires rental costs associated with ground or building operating leases incurred during a
construction period to be recognized as expense. FSP 13-1 is effective for reporting periods beginning
after December 15, 2005. Retroactive application is permitted, but not required. Had FSP 13-1 been
effective, the Company would have recognized additional pre-opening costs of $4,229, $3,626 and
$2,489 for the years ended December 31, 2005, 2004 and 2003, respectively.
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