Chipotle 2006 Annual Report Download - page 49

Chipotle Mexican Grill, Inc.
Notes to Consolidated Financial Statements—(Continued)
(dollar and share amounts in thousands, unless otherwise specified)
subsequent to January 1, 2005, based on the grant date fair value estimated in accordance with the provisions of
FAS 123R. Compensation expense is generally recognized over the vesting period. The following table illustrates
the effect on net income as if the fair value based method had been applied to all outstanding and unvested
awards for the year ended December 31, 2004.
Net income, as reported ............................................... $6,126
Stock-based employee compensation expense .............................. (527)
Pro forma net income ................................................. $5,599
Earnings per share:
Basic, as reported .................................................... $ 0.24
Diluted, as reported .................................................. $ 0.24
Basic, pro forma ..................................................... $ 0.22
Diluted, pro forma ................................................... $ 0.22
Restaurant Pre-Opening Costs
Pre-opening costs, including wages, benefits and travel for the training and opening teams, food and other
restaurant operating costs, are expensed as incurred prior to a restaurant opening for business. These costs
include rent since the adoption of FASB Staff Position No. FAS 13-1 Accounting for Rental Costs Incurred
During a Construction Period, (“FSP 13-1”) in January 2006.
Insurance Liability
The Company maintains various insurance policies for workers’ compensation, employee health, general
liability and property damage. Pursuant to these policies, the Company is responsible for losses up to certain
limits and is required to estimate a liability that represents the ultimate exposure for aggregate losses below those
limits. This liability is based on management’s estimates of the ultimate costs to be incurred to settle known
claims and claims not reported as of the balance sheet date. The estimated liability is not discounted and is based
on a number of assumptions and factors, including historical trends, actuarial assumptions, and economic
conditions. If actual trends differ from the estimates, the financial results could be impacted.
Advertising Costs
Advertising is expensed as incurred and aggregated $13,918, $10,748 and $8,715 for the years ended
December 31, 2006, 2005 and 2004, respectively.
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. Prior to
January 1, 2006, rent expense for the period prior to restaurant opening was capitalized and included in leasehold
improvements in the consolidated balance sheet. Rent capitalized during the pre-opening period was $4,229 and
$3,626 for the years ended December 31, 2005 and 2004, respectively. Effective January 1, 2006 with the
adoption of FSP 13-1 pre-opening rent is included in pre-opening costs in the income statement. For the year
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