Jack In The Box 2005 Annual Report Download - page 51

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations – Jack in the Box Inc. (the “Company”) operates and franchises JACK IN THE BOX quick-service
restaurants and Qdoba Mexican Grill fast-casual restaurants.
Basis of presentation and fiscal year – The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and the accounts of any variable interest entities where we are deemed the primary beneficiary.
All significant intercompany transactions are eliminated. Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the fiscal 2005 presentation. Our fiscal year is 52 or 53 weeks ending the
Sunday closest to September 30. Fiscal years 2005 and 2003 include 52 weeks, and fiscal year 2004 includes 53 weeks.
Financial instruments – The fair values of cash and cash equivalents, accounts and notes receivable, accounts payable and
accrued liabilities approximate the carrying amounts due to their short maturities. Company-owned life insurance
(“COLI”) policies, included in other assets, are recorded at their cash surrender values. The fair values of each of our long-
term debt instruments are based on quoted market values, where available, or on the amount of future cash flows associated
with each instrument, discounted using our current borrowing rate for similar debt instruments of comparable maturity.
The estimated fair values of our long-term debt at October 2, 2005 and October 3, 2004 approximate their carrying values.
From time-to-time, we use commodity derivatives to reduce the risk of price fluctuations related to raw material
requirements for commodities such as beef and pork, and utility derivatives to reduce the risk of price fluctuations related
to natural gas. We also use interest rate swap agreements to manage interest rate exposure. We do not speculate using
derivative instruments, and we purchase derivative instruments only for the purpose of risk management.
All derivatives are recognized on the consolidated balance sheets at fair value based upon quoted market prices. Changes
in the fair values of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is
designated as a hedge transaction. Gains or losses on derivative instruments reported in other comprehensive income are
classified to earnings in the period the hedged item affects earnings. If the underlying hedge transaction ceases to exist, any
associated amounts reported in other comprehensive income are reclassified to earnings at that time. Any ineffectiveness is
recognized in earnings in the current period. At October 2, 2005, we had two interest rate swaps in effect and no
outstanding commodity or utility derivatives. Refer to Note 4, Long-Term Debt, for additional discussion regarding our
interest rate swaps.
At October 2, 2005 and October 3, 2004, we had no material financial instruments subject to significant market exposure
other than the COLI policies discussed above.
Cash and cash equivalents – We invest cash in excess of operating requirements in short-term, highly liquid investments
with original maturities of three months or less, which are considered cash equivalents. We have restricted cash and cash
equivalents of approximately $45,580. Refer to Note 4, Long-Term Debt, for additional discussion regarding our restricted
cash.
Inventories are valued at the lower of cost or market on a first-in, first-out basis.
Assets held for sale and leaseback primarily represent the costs for new sites that we plan to sell and lease back when
construction is completed. Gains or losses realized on the sale-leaseback transactions are deferred and amortized to income
over the lease terms. The leases are classified in accordance with Statement of Financial Accounting Standards (“SFAS”)
13, Accounting for Leases, and SFAS 98, Accounting for Leases. During 2005 and 2004, we exercised our purchase option
under certain lease arrangement. We intend to sell and lease back these properties at more favorable rental rates and as
such, these sites are included in assets held for sale and leaseback at October 2, 2005 and October 3, 2004.
Property and equipment, at cost – Expenditures for new facilities and equipment, and those that substantially increase the
useful lives of the property, are capitalized. Facilities leased under capital leases are stated at the present value of
minimum lease payments at the beginning of the lease term, not to exceed fair value. Maintenance and repairs are
expensed as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the accounts, and gains or losses on the dispositions are reflected in results of operations.
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