Panera Bread 2008 Annual Report Download - page 65

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Foreign Currency Translation
The Company has Canadian subsidiaries which have foreign operations and use their local currency as their
functional currency. Assets and liabilities are translated into U.S. dollars using the current exchange rate in effect at
the balance sheet date, while revenues and expenses are translated at the weighted-average exchange rate during the
fiscal period. The resulting translation adjustments are recorded as a separate component of accumulated other
comprehensive income in the Consolidated Statements of Stockholders’ Equity. Gains and losses resulting from
foreign currency transactions have not historically been significant and are included in other (income) expense, net
in the Consolidated Statements of Operations.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, which include short-term investments in
trading securities, accounts receivable, accounts payable, and other accrued expenses, approximate their fair values
due to their short maturities. The Company’s investments in trading securities are stated at fair value, with gains or
losses resulting from changes in fair value recognized currently in earnings as other (income) expense, net in the
Consolidated Statements of Operations.
Derivative Financial Instruments
The Company periodically enters into swap agreements to manage fluctuating commodity prices. Swap
agreements designated at inception as a hedge are accounted for under the deferral method, with gains and losses
from hedging activity included in the cost of sales as those inventories are sold or as the anticipated hedge
transaction occurs. Swap agreements not designated as effective hedges of firm commitments or anticipated
underlying transactions are marked to market at the end of the reporting period, with the resulting gains or losses
recognized in cost of food and paper products. The Company does not invest in derivative financial instruments for
trading purposes. At December 30, 2008 and December 25, 2007, the Company did not have any outstanding
derivative financial instruments.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with SFAS No. 123R, Share-Based
Payment, which requires the Company to measure and record compensation expense in the Company’s consolidated
financial statements for all stock-based compensation awards using a fair value method. The Company maintains
several stock-based incentive plans under which the Company may grant incentive stock options and non-statutory
stock options for a fixed number of shares to certain directors, officers, employees and consultants with an exercise
price equal to the fair value of the shares at the date of grant. The Company also may grant restricted stock and
restricted stock units with fair value determined based on the Company’s closing stock price on the date of grant. In
addition, the Company offers a stock purchase plan where employees may purchase the Company’s common stock
each calendar quarter through payroll deductions at 85 percent of market value on the purchase date and the
Company recognizes compensation expense on the 15 percent discount.
For stock options, fair value is determined using the Black-Scholes option pricing model, which requires the
input of subjective assumptions. These assumptions include estimating the expected term until the option award is
either exercised or canceled, the expected volatility of the Company’s stock price, for a period approximating the
expected term, the risk-free interest rate with a maturity that approximates the options expected term, and the
dividend yield based on the Company’s anticipated dividend payout over the expected term of the option award.
Additionally, the Company uses its historical experience to estimate the expected forfeiture rate in determining the
stock-based compensation expense for these awards. The fair value of the awards is amortized over the vesting
period. Options and restricted stock generally vest ratably over a four-year period beginning two years from the date
of grant and options generally have a six-year term. Stock-based compensation expense was included in general and
administrative expenses in the Consolidated Statements of Operations.
58
PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)