El Pollo Loco 2015 Annual Report Download - page 51

Table of Contents
Long
-Lived Assets
We state the value of our property and equipment, including primarily leasehold improvements and restaurant equipment, furniture, and fixtures,
at cost, minus accumulated depreciation and amortization. We calculate depreciation using the straight-line method of accounting over the
estimated useful lives of the related assets. We amortize our leasehold improvements using the straight-line method of accounting over the
shorter of the lease term (including reasonably assured renewal periods) or the estimated useful lives of the related assets. We expense repairs
and maintenance as incurred, but capitalize major improvements and betterments. We make judgments and estimates related to the expected
useful lives of those assets that are affected by factors such as changes in economic conditions and changes in operating performance. If we
change our assumptions in the future, we may be required to record impairment charges for these assets.
Insurance Reserves
We are responsible for workers’ compensation, general, and health insurance claims up to a specified amount. We maintain a reserve for
estimated claims both reported and incurred but not reported, based on historical claims experience and other assumptions. In estimating our
insurance accruals, we utilize independent actuarial estimates of expected losses, which are based on statistical analyses of historical data. Our
actuarial assumptions are closely monitored and adjusted when warranted by changing circumstances. Should claims occur or medical costs
increase in greater amounts than we have expected, accruals may not be sufficient, and we may record additional expenses.
Accounting for Lease Obligations
We lease a substantial number of our restaurant properties. At the inception of each lease, we evaluate the property and the lease to determine
whether the lease is an operating lease or a capital lease. This lease accounting evaluation may require significant judgment in determining the
fair value and useful life of the leased property and the appropriate lease term. The lease term used for the evaluation includes renewal option
periods only in instances in which the exercise of the renewal option can be reasonably assured because failure to exercise such an option would
result in an economic penalty. Such an economic penalty would typically result from our having to abandon a building or fixture with remaining
economic value upon vacating a property.
Franchise Operations
We sublease a number of restaurant properties to our franchisees. As such, we remain principally liable for the underlying leases. If sales trends
or economic conditions worsen for our franchisees, their financial health may worsen, our collection rates may decline, and we may be required
to assume the responsibility for additional lease payments on what are presently franchised restaurants.
Income Taxes
We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on temporary
differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which
the temporary differences are expected to reverse. As of December 31, 2014, we had federal and state net operating loss (“NOL”) carryforwards
of $116 million and $134 million, respectively. These NOLs expire beginning in 2025 and 2015, respectively.
A valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets. The ability to realize deferred
tax assets is dependent upon our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each
tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:
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future reversals of existing taxable temporary differences;
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future taxable income or loss, exclusive of reversing temporary differences and carryforwards;