Einstein Bros 2005 Annual Report Download - page 27

http://www.sec.gov/Archives/edgar/data/949373/000110465906016136/a06-3178_110k.htm[9/11/2014 10:13:03 AM]
In December 2004, the FASB issued SFAS No. 123 (revised 2004) entitled Share-Based Payment (SFAS No. 123R). SFAS No. 123R
addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for a) equity
instruments of the enterprise or b) liabilities that are based on the fair value of the enterprise’ s equity instruments or that may be settled by the
issuance of such equity instruments. The Statement eliminates the ability to account for share-based compensation transactions using APB Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25), and generally would require instead that such transactions be accounted for
using a fair-value-based method. This Statement is to be implemented at the beginning of the next fiscal year that begins after June 15, 2005.
Based on options granted and various assumptions used to calculate stock based compensation expense as of January 3, 2006, we believe that the
adoption will result in an increase in expense of approximately $0.6 million and $0.1 million during fiscal 2006 and 2007, respectively. If actual
events differ from our assumptions used to calculate the expense or if we grant additional options, our financial results could be impacted.
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In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,
Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements
for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles were
required recognition via a cumulative effect adjustment within net income of the period of the change. SFAS No. 154 requires retrospective
application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect
of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the Statement
does not change the transition provisions of any existing accounting pronouncements.
We have considered all other recently issued accounting pronouncements and do not believe that the adoption of such pronouncements will
have a material impact on our consolidated financial statements.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies impact our more significant judgments and estimates used in the preparation of our
consolidated financial statements. Our significant accounting policies are discussed in Note 2 to our consolidated financial statements set forth in
Item 8 of this report.
Impairment of Long-Lived Assets
We review property and equipment and amortizing intangible assets for impairment when events or circumstances indicate that the carrying
amount of a restaurant’ s assets may not be recoverable. We test for impairment using historical cash flows and other relevant facts and
circumstances as the primary basis for our estimate of future cash flows. Relevant facts and circumstances may include, but are not limited to, local
competition in the area, the ability of existing restaurant management, the necessity of tiered pricing structures and the impact that refreshing our
restaurants may have on our estimates. This process requires the use of estimates and assumptions, which are subject to high degree of judgment. In
the event that these estimates and assumptions change in the future, we may be required to record impairment charges for these assets.
At least annually, we utilize independent valuation experts to assist us in assessing the recoverability of goodwill and other intangible assets
not subject to amortization related to our restaurant concepts. These impairment tests require us to estimate the fair values of our restaurant
concepts by making assumptions regarding future profits and cash flows, expected growth rates, terminal values, discount rates and other factors.
In the event that these assumptions change in the future, we may be required to record impairment charges for these assets.
Insurance Reserves
We are insured for certain losses related to health, general liability and workers’ compensation under large deductible policies. The insurance
liability represents an estimate of the ultimate cost of claims
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