Chipotle 2013 Annual Report Download - page 38

We’re obligated under non-cancelable leases for our restaurants and administrative offices. Our leases
generally have initial terms of either five to ten years with two or more five-year extensions, for end-cap and in-
line restaurants, or 15 to 20 years with several five-year extensions, for free-standing restaurants. Our leases
generally require us to pay a proportionate share of real estate taxes, insurance, common charges and other
operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds,
although we generally do not expect to pay significant contingent rent on these properties based on the thresholds
in those leases.
Off-Balance Sheet Arrangements
As of December 31, 2013 and 2012, we had no off-balance sheet arrangements or obligations.
Inflation
The primary areas of our operations affected by inflation are food, healthcare costs, labor, fuel, utility costs,
materials used in the construction of our restaurants, and insurance. Although almost all of our crew members
make more than the minimum wage, increases in the applicable federal or state minimum wage may have an
impact on our labor costs. Additionally, many of our leases require us to pay taxes, maintenance, utilities and
insurance, all of which are generally subject to inflationary increases.
Critical Accounting Estimates
We describe our significant accounting policies in Note 1 of our consolidated financial statements included
in Item 8. “Financial Statements and Supplementary Data.” Critical accounting estimates are those that we
believe are both significant and that require us to make difficult, subjective or complex judgments, often because
we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical
experiences and various other factors that we believe to be appropriate under the circumstances. Actual results
may differ from these estimates, and we might obtain different estimates if we used different assumptions or
factors. We believe the following critical accounting estimates affect our more significant judgments and
estimates used in the preparation of our financial statements:
Leases
We lease most of our restaurant locations. Our leases typically contain escalating rentals over the lease term
as well as optional renewal periods. We have estimated that our lease term, including reasonably assured renewal
periods, is the lesser of the lease term or 20 years. We account for our leases by recognizing rent expense on a
straight-line basis over the reasonably assured lease term. The majority of our leasehold improvements are also
depreciated over the reasonably assured lease term. If the estimate of our reasonably assured lease term was
changed, our depreciation and rent expense could differ materially.
Stock-based Compensation
We recognize compensation expense for equity awards over the vesting period based on the award’s fair
value. We use the Black-Scholes valuation model to determine the fair value of our stock-only stock appreciation
rights, or SOSARs, which requires assumptions to be made regarding our stock price volatility, the expected life
of the award and expected dividend rates. The volatility assumption was based on our historical data and implied
volatility, and the expected life assumptions were based on our historical data. Similarly, the compensation
expense of performance share awards and SOSARs with performance-based vesting conditions is based in part
on the estimated probability of our achieving levels of performance associated with particular levels of payout for
performance shares and with vesting for performance SOSARs. We determine the probability of achievement of
future levels of performance by comparing the relevant performance level with our internal estimates of future
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Annual Report