IHOP 2011 Annual Report Download - page 76

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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.
We recognize deferred tax assets and liabilities using the enacted tax rates for the effect of temporary differences between
the financial reporting basis and the tax basis of recorded assets and liabilities. Deferred tax accounting requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that some portions or all of the net deferred tax assets will
not be realized. This test requires projection of our taxable income into future years to determine if there will be taxable income
sufficient to realize the tax assets. The preparation of the projections requires considerable judgment and is subject to change to
reflect future events and changes in the tax laws. When we establish or reduce the valuation allowance against our deferred tax
assets, our income tax expense will increase or decrease, respectively, in the period such determination is made.
Tax contingency reserves result from our estimates of potential liabilities resulting from differences between actual and
audited results. We usually file our income tax returns several months after our fiscal year end. All tax returns are subject to audit
by federal and state governments, usually years after the returns are filed, and could be subject to differing interpretation of the
tax laws. Changes in the tax contingency reserves result from resolution of audits of prior year filings, the expiration of the statute
of limitations, changes in tax laws and current year estimates for asserted and unasserted items. Inherent uncertainties exist in
estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions' tax court
systems. Significant changes in our estimates could materially affect our reported results.
Under U.S. GAAP addressing the accounting for uncertainty in income taxes, tax positions that previously failed to meet