Chipotle 2006 Annual Report Download - page 48

Chipotle Mexican Grill, Inc.
Notes to Consolidated Financial Statements—(Continued)
(dollar and share amounts in thousands, unless otherwise specified)
Impairment of Long-Lived Assets
In accordance with FASB Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
Asset (“FAS 144”), long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair
value of the asset. During the year ended December 31, 2006, an aggregate impairment charge of $693 was
recognized in loss on disposition of assets in the consolidated statement of income for the closure of one
restaurant due to structural damage to the leased site and due to an upcoming closure of another restaurant due to
the landlord’s decision to redevelop the location. Fair value of each restaurant was determined using the expected
cash flows method of anticipated cash flows through the estimated date of closure. No impairment charges were
recognized in the years ended December 31, 2005 and 2004.
Fair Value of Financial Instruments
The carrying value of the Company’s financial assets and liabilities, because of their short-term nature,
approximates fair value.
Income Taxes
Prior to the completion of the Company’s initial public offering, its results of operations were included in
the consolidated federal and state income tax returns of McDonald’s. Upon the completion of the Company’s
initial public offering in January 2006, it exited the consolidated tax group for federal and certain state income
tax purposes. Upon completion of the Disposition in October 2006, the Company exited the McDonald’s
consolidated tax group for the remaining state returns. During the period the Company was included in
McDonald’s consolidated tax returns, the provision for income taxes was calculated on a separate income tax
return basis. The Company recognizes deferred tax assets and liabilities at enacted income tax rates for the
temporary differences between the financial reporting bases and the tax bases of its assets and liabilities. Any
effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of
enactment. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the
future, the Company provides a corresponding valuation allowance against the deferred tax asset.
Equity-Based Compensation Plans
Prior to January 1, 2005, the Company accounted for its equity-based compensation plan using the
intrinsic-value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, as permitted by FASB Standard No. 123, Accounting for
Stock-Based Compensation (“FAS 123”). Prior to January 1, 2005, no compensation expense was recognized on
stock option grants as the exercise price equaled the fair value at the date of grant. Accordingly, share-based
compensation was included as a pro forma disclosure in the financial statement footnotes.
Effective January 1, 2005, the Company early adopted the fair value recognition provisions of FASB
Standard No. 123(R), Share-Based Payment (“FAS 123R”), using the modified-prospective transition method.
Under this transition method, compensation cost in 2005 includes the portion vesting in the period for (1) all
share-based payments granted prior to, but not vested as of January 1, 2005, based on the grant date fair value
estimated in accordance with the original provisions of FAS 123 and (2) all share-based payments granted
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