IHOP 2009 Annual Report Download - page 88

There is potential for variability in the rent holiday period, which begins on the possession date
and ends on the restaurant open date, during which no cash rent payments are typically due under the
terms of the lease. Factors that may affect the length of the rent holiday period generally relate to
construction related delays. Extension of the rent holiday period due to delays in restaurant opening
will result in greater preopening rent expense recognized during the rent holiday period and lesser
occupancy expense during the rest of the lease term (post-opening).
For leases that contain rent escalations, we record the total rent payable during the lease term, as
determined above, on the straight-line basis over the term of the lease (including the rent holiday
period beginning upon our possession of the premises), and record the difference between the
minimum rents paid and the straight-line rent as a lease obligation. Certain leases contain provisions
that require additional rental payments based upon restaurant sales volume (‘‘contingent rent’’).
Contingent rentals are accrued each period as the liabilities are incurred, in addition to the straight-line
rent expense noted above.
Certain of our lease agreements contain tenant improvement allowances. For purposes of
recognizing incentives, we amortize the incentives over the shorter of the estimated useful life or lease
term. For tenant improvement allowances, we also record a deferred rent liability or an obligation in
our non-current liabilities on the consolidated balance sheets.
Management makes judgments regarding the probable term for each restaurant property lease,
which can impact the classification and accounting for a lease as capital or operating, the rent holiday
and/or escalations in payment that are taken into consideration when calculating straight-line rent and
the term over which leasehold improvements for each restaurant are amortized. These judgments may
produce materially different amounts of depreciation, amortization and rent expense than would be
reported if different assumed lease terms were used.
Stock-Based Compensation
We account for stock-based compensation in accordance with U.S. GAAP governing share-based
payments. Accordingly, we measure stock-based compensation expense at the grant date, based on the
fair value of the award, and recognize the expense over the employee’s requisite service period using
the straight-line method. The fair value of each employee stock option and restricted stock award is
estimated on the date of grant using an option pricing model that meets certain requirements. We
currently use the Black-Scholes option pricing model to estimate the fair value of our share-based
compensation. The Black-Scholes model meets the requirements of U.S. GAAP. The measurement of
stock-based compensation expense is based on several criteria including, but not limited to, the
valuation model used and associated input factors, such as expected term of the award, stock price
volatility, risk free interest rate and forfeiture rate. These inputs are subjective and are determined
using management’s judgment. If differences arise between the assumptions used in determining stock-
based compensation expense and the actual factors which become known over time, we may change the
input factors used in determining future stock-based compensation expense. Any such changes could
materially impact our operations in the period in which the changes are made and in subsequent
periods.
Income Taxes
We provide for income taxes based on our estimate of federal and state income tax liabilities. Our
annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to
us in the various jurisdictions in which we operate. Tax laws are complex and subject to different
interpretations by the taxpayers and respective governmental authorities. Significant judgment is
required in determining our tax expense and in evaluating our tax positions. We review our tax
positions quarterly and adjust the balances as new information becomes available.
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