Jack In The Box 2005 Annual Report Download - page 53

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Franchise operations – Franchise arrangements generally provide for initial franchise fees and continuing payments to us
based on a percentage of sales. Among other things, a franchisee may be provided the use of land and building, generally
for a period of 20 years, and is required to pay negotiated rent, property taxes, insurance and maintenance. Franchise fees
are recorded as revenue when we have substantially performed all of our contractual obligations. Expenses associated with
the issuance of the franchise are expensed as incurred. Franchise royalties are recorded in income on an accrual basis.
Certain franchise rents, which are contingent upon sales levels, are recognized in the period in which the contingency is
met. Gains on the sale of restaurant businesses to franchisees are recorded as other revenue when the sales are
consummated and certain other revenue recognition criteria are met.
Advertising costs – We maintain marketing funds which include contributions of approximately 5% and 1% of sales at all
company-operated JACK IN THE BOX and Qdoba restaurants, respectively, as well as contractual marketing fees paid
monthly by franchisees. Production costs of commercials, programming and other marketing activities are charged to the
marketing funds when the advertising is first used, and the costs of advertising are charged to operations as incurred. Our
contributions to the marketing funds and other marketing expenses, which are included in selling, general, and
administrative expenses in the accompanying consolidated statements of earnings, were $104,605, $103,721 and $94,807 in
2005, 2004 and 2003, respectively.
Variable interest entities – In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No.
46R, Consolidation of Variable Interest Entities (“FIN 46R”). FIN 46R requires the primary beneficiary of a variable
interest entity to consolidate that entity. The primary beneficiary of a variable interest entity is the party that absorbs a
majority of the variable interest entity’ s expected losses, receives a majority of the entity’ s expected residual returns, or
both, as a result of ownership, contractual or other financial interests in the entity.
The primary entities we possess a variable interest in are franchise entities which operate our franchised restaurants. We
do not possess any ownership interests in our franchisees and we do not generally provide financial support to our
franchisees. We have reviewed these franchise entities and determined that the Company is not the primary beneficiary of
the entities and therefore, these entities have not been consolidated.
We use two advertising funds to administer our advertising programs. These funds are consolidated into the Company’ s
financial statements as they are deemed to be variable interest entities for which the Company is the primary beneficiary.
Contributions to these funds are designed for advertising, and the Company administers the funds’ contributions. In
accordance with SFAS 45, Accounting for Franchise Fee Revenue, contributions from franchisees, when received, are
recorded as offsets to the Company’ s reported advertising expense in its consolidated statements of earnings.
Income taxes – Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as
tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Net earnings per share – Basic net earnings per share is computed using the weighted-average shares outstanding during
the period. Diluted net earnings per share is computed using the dilutive effect of including stock options and restricted
stock in the calculation of weighted-average shares outstanding.
Segment reporting – An operating segment is defined as a component of an enterprise that engages in business activities
from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated
by chief operating decision makers in deciding how to allocate resources. Similar operating segments can be aggregated
into a single operating segment if the businesses are similar. Jack in the Box Inc. operates its business in two operating
segments, JACK IN THE BOX and Qdoba.
Restricted stock – Restricted stock awards are recognized as unearned compensation in stockholders’ equity based upon the
fair value of the Company’ s common stock on the award date. Unearned compensation is amortized to compensation
expense over the estimated vesting period.
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