Cracker Barrel 2008 Annual Report Download - page 48

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reported claims at the anticipated cost to us based upon
an actuarially determined reserve as of the end of our
third quarter and adjusting it by the actuarially
determined losses and actual claims payments for the
fourth quarter. Those reserves and losses are determined
actuarially from a range of possible outcomes within
which no given estimate is more likely than any other
estimate. In accordance with SFAS No. 5, “Accounting for
Contingencies,” we record the actuarially determined
losses at the low end of that range and discount them to
present value using a risk-free interest rate based on
actuarially projected timing of payments. We also monitor
actual claims development, including incurrence or
settlement of individual large claims during the interim
period between actuarial studies as another means
of estimating the adequacy of our reserves. We record a
liability for our group health program for all unpaid
claims based primarily upon a loss development analysis
derived from actual group health claims payment
experience provided by our third party administrator.
Our accounting policies regarding insurance reserves
include certain actuarial assumptions or management
judgments regarding economic conditions, the frequency
and severity of claims and claim development history and
settlement practices. We have not made any material
changes in the accounting methodology used to establish
our insurance reserves during the past three fiscal years
and do not believe there is a reasonable likelihood that
there will be a material change in the estimates or
assumptions used to calculate the insurance reserves.
However, changes in these actuarial assumptions or
management judgments in the future may produce
materially different amounts of expense than would be
reported under these insurance programs.
Inventory Shrinkage
Cost of goods sold includes the cost of retail merchandise
sold at the Cracker Barrel stores utilizing the retail
inventory accounting method. It includes an estimate of
shortages that are adjusted upon physical inventory
counts. In 2006, the physical inventory counts for all
Cracker Barrel stores and the retail distribution center
were conducted as of the end of 2006 and shrinkage was
recorded based on the physical inventory counts taken.
During 2007, the Company changed the timing of its
physical inventory counts. Beginning in 2007, physical
inventory counts are conducted throughout the third and
fourth quarters of the fiscal year based upon a cyclical
inventory schedule. During 2007, the Company also
changed its method for calculating inventory shrinkage
for the time period between physical inventory counts by
using a three-year average of the results from the current
year physical inventory and the previous two physical
inventories on a store-by-store basis. The impact of this
change on our Consolidated Financial Statements was
immaterial. We have not made any material changes in
the methodology used to estimate shrinkage during 2008
and do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or
assumptions used to calculate shrinkage. However, actual
shrinkage recorded may produce materially different
amounts of shrinkage than we have estimated.
Tax Provision
We must make estimates of certain items that comprise
our income tax provision. These estimates include
employer tax credits for items such as FICA taxes paid on
employee tip income, Work Opportunity and Welfare to
Work credits, as well as estimates related to certain
depreciation and capitalization policies. Also, in 2008, we
adopted FIN 48. FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 requires
that a position taken or expected to be taken in a tax
return be recognized (or derecognized) in the financial
statements when it is more likely than not (i.e., a
likelihood of more than fifty percent) that the position
would be sustained upon examination by tax
authorities. A recognized tax position is then measured
at the largest amount of benefit that is greater than
fifty percent likely of being realized upon ultimate
settlement. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.