Panera Bread 2009 Annual Report Download - page 43

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are inherently uncertain. There have been no material changes to our application of critical accounting policies and
significant judgments and estimates since December 30, 2008.
Revenue Recognition
We recognize revenue from bakery-cafe sales upon delivery of the related food and other products to the
customer. Revenue from fresh dough sales to franchisees is recorded upon delivery of fresh dough to franchisees.
Also, a liability is recorded in the period in which a gift card is issued and proceeds are received. As gift cards are
redeemed, this liability is reduced and revenue is recognized as a sale. Further, franchise fees are the result of the
sale of area development rights and the sale of individual franchise locations to third parties. The initial franchise fee
is generally $35,000 per bakery-cafe to be developed under the Area Development Agreement, or ADA. Of this fee,
$5,000 is generally paid at the time of signing of the ADA and is recognized as revenue when it is received as it is
non-refundable and we have to perform no other service to earn this fee. The remainder of the fee is paid at the time
an individual franchise agreement is signed and is recognized as revenue upon the opening of the bakery-cafe.
Royalties are generally paid weekly based on a percentage of sales specified in each ADA (generally 4 percent to
5 percent of sales). Royalties are recognized as revenue when they are earned.
Valuation of Goodwill
We record goodwill related to the excess of the purchase price over the fair value of net assets acquired. At
December 29, 2009 and December 30, 2008, our goodwill balance was $87.5 million and $87.3 million, respec-
tively. Goodwill is subject to periodic evaluation for impairment when circumstances warrant, or at least once per
year. We perform our annual impairment assessment as of the first day of the fourth quarter of each year. Impairment
is tested in accordance with the accounting standard for goodwill, by comparing the carrying value of the reporting
unit to its estimated fair value. As quoted market prices for our reporting units are not available, fair value is
estimated based on the present value of expected future cash flows, with forecasted average growth rates of
approximately four percent and average discount rates of 10 percent used in the fiscal 2009 analysis for the
reporting units, which are commensurate with the risks involved in the reporting units. We use current results,
trends, future prospects, and other economic factors as the basis for expected future cash flows.
Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. We
make every effort to forecast these future cash flows as accurately as possible with the information available at the
time the forecast is developed. However, changes in the assumptions and estimates may affect the carrying value of
goodwill, and could result in impairment charges in future periods. Factors that have the potential to create
variances between forecasted cash flows and actual results include but are not limited to (i) fluctuations in sales
volumes; (ii) commodity costs, such as wheat and fuel; and (iii) acceptance of our pricing actions undertaken in
response to rapidly changing commodity prices and other product costs. Refer to “Forward-Looking Statements”
included in the beginning of our fiscal 2009 Form 10-K for further information regarding the impact of estimates of
future cash flows.
The calculation of fair value could increase or decrease depending on changes in the inputs and assumptions
used, such as changes in the financial performance of the reporting units, future growth rate, and discount rate. In
order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a
hypothetical decrease in cash flows, and made changes to our projected growth rate and discount rate which we
believe are considered appropriate. Based on the goodwill analysis performed as of September 30, 2009, the first
day of our fiscal fourth quarter, the outlined changes in our assumptions would not affect the results of the
impairment test, as all reporting units still have an excess of fair value over the carrying value.
As of December 29, 2009, we determined there was no impairment of goodwill. While the fair value of our
reporting units exceeded carrying value under the present value of expected future cash flows model by more than
100 percent for all of our reporting units, there can be no assurance future goodwill impairment tests will not result
in a charge to earnings.
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