Jack In The Box 2012 Annual Report Download - page 31

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We have identified the following as our most critical accounting estimates, which are those that are most important to the portrayal of the Company’s
financial condition and results, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting
estimates and policies are disclosed in Note 1 to our consolidated financial statements.
Long-lived Assets — Property, equipment and certain other assets, including amortized intangible assets, are reviewed for impairment when indicators of
impairment are present. This review generally includes a restaurant-level analysis, except when we are actively selling a group of restaurants, in which case we
perform our impairment evaluations at the group level. Impairment evaluations for individual restaurants take into consideration a restaurant’s operating cash
flows, the period of time since a restaurant has been opened or remodeled, refranchising expectations, and the maturity of the related market. Impairment
evaluations for a group of restaurants take into consideration the group’s expected future cash flows and sales proceeds from bids received, if any, or fair
market value based on, among other considerations, the specific sales and cash flows of those restaurants. If the assets of a restaurant or group of restaurants
subject to our impairment evaluation are not recoverable based upon the forecasted, undiscounted cash flows, we recognize an impairment loss as the amount
by which the carrying value of the assets exceeds fair value. Our estimates of cash flows used to assess impairment are subject to a high degree of judgment
and may differ from actual cash flows due to, among other things, economic conditions or changes in operating performance. During fiscal year 2012,
impairment charges to write down certain assets to their estimated fair value were not material.
Retirement Benefits — Our defined benefit and other postretirement plans’ costs and liabilities are determined using several statistical and other factors,
which attempt to anticipate future events, including assumptions about the discount rate and expected return on plan assets. Our discount rate is set annually
by us, with assistance from our actuaries, and is determined by considering the average of pension yield curves constructed of a population of high-quality
bonds with a Moody’s or Standard and Poor’s rating of “AA” or better meeting certain other criteria. As of September 30, 2012, our discount rate was 4.34%
for our defined benefit and postretirement benefit plans. Our expected long-term rate of return on assets is determined taking into consideration our projected
asset allocation and economic forecasts prepared with the assistance of our actuarial consultants. As of September 30, 2012, our assumed expected long-term
rate of return was 7.25% for our qualified defined benefit plan. The actuarial assumptions used may differ materially from actual results due to changing
market and economic conditions, higher or lower turnover and retirement rates or longer or shorter life spans of participants. These differences may affect the
amount of pension expense we record. A hypothetical 25 basis point reduction in the assumed discount rate and expected long-term rate of return on plan assets
would have resulted in an estimated increase of $2.0 million and $0.1 million, respectively, in our fiscal 2012 pension and postretirement plan expense.
Excluding the additional costs for VERP incurred in fiscal 2012, we expect our pension and postretirement expense to increase $3.8 million in fiscal 2013
principally due to a decrease in our discount rate from 5.60% to 4.34%.
Self Insurance — We are self-insured for a portion of our losses related to workers’ compensation, general liability, automotive, and health benefits. In
estimating our self-insurance accruals, we utilize independent actuarial estimates of expected losses, which are based on statistical analysis of historical data.
These assumptions are closely monitored and adjusted when warranted by changing circumstances. Should a greater amount of claims occur compared to
what was estimated or medical costs increase beyond what was expected, accruals might not be sufficient, and additional expense may be recorded.
Restaurant Closing Costs — Restaurant closing costs consist of future lease commitments, net of anticipated sublease rentals and expected ancillary
costs. We record a liability for the net present value of any remaining lease obligations, net of estimated sublease income, at the date we cease using a property.
Subsequent adjustments to the liability as a result of changes in estimates of sublease income or lease cancellations are recorded in the period incurred. The
estimates we make related to sublease income are subject to a high degree of judgment and may differ from actual sublease income due to changes in economic
conditions, desirability of the sites and other factors.
Share-based Compensation — We offer share-based compensation plans to attract, retain and incentivize key officers, non-employee directors and
employees to work toward the financial success of the Company. Share-based compensation cost for our stock option grants is estimated at the grant date
based on the award’s fair-value as calculated by an option pricing model and is recognized as expense ratably over the requisite service period. The option
pricing models require various highly judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used in
the model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.
Goodwill and Other Intangibles — We evaluate goodwill and non-amortizing intangible assets annually, or more frequently if indicators of impairment
are present. Our impairment analyses first include a qualitative assessment to determine whether events
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