Panera Bread 2011 Annual Report Download - page 56

48
provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.
The Company classifies estimated interest and penalties related to the unrecognized tax benefits as a component of income taxes
in the Consolidated Statements of Operations.
Capitalization of Certain Development Costs
The Company has elected to account for construction costs in accordance with the accounting standard for real estate in the
Company’s consolidated financial statements. The Company capitalizes direct and indirect costs clearly associated with the
acquisition, development, design, and construction of bakery-cafe locations and fresh dough facilities as these costs have a future
benefit to the Company. The types of specifically identifiable costs capitalized by the Company include primarily payroll and
payroll related taxes and benefit costs incurred within the Company’s development department. The Company’s development
department focuses solely on activities involving the acquisition, development, design, and construction of bakery-cafes and fresh
dough facilities. The Company does not consider for capitalization payroll or payroll-related costs incurred in other departments,
including general and administrative functions, as these other departments do not directly support the acquisition, development,
design, and construction of bakery-cafes and fresh dough facilities. The Company uses an activity-based methodology to determine
the amount of costs incurred within the development department for Company-owned projects, which are capitalized, and those
for franchise-operated projects and general and administrative activities, which both are expensed as incurred. If the Company
subsequently makes a determination that a site for which development costs have been capitalized will not be acquired or developed,
any previously capitalized development costs are expensed and included in general and administrative expenses in the Consolidated
Statements of Operations.
The Company capitalized $7.7 million, $8.7 million, and $8.4 million direct and indirect costs related to the development of
Company-owned bakery-cafes for the fiscal years ended December 27, 2011, December 28, 2010, and December 29, 2009,
respectively. The Company amortizes capitalized development costs for each bakery-cafe and fresh dough facility using the straight-
line method over the shorter of their estimated useful lives or the related reasonably assured lease term and includes such amounts
in depreciation and amortization in the Consolidated Statements of Operations. In addition, the Company assesses the recoverability
of capitalized costs through the performance of impairment analyses on an individual bakery-cafe and fresh dough facility basis
pursuant to the accounting standard for property and equipment, net specifically related to the accounting for the impairment or
disposal of long-lived assets.
Deferred Financing Costs
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense
based on the related debt agreement using the straight-line method, which approximates the effective interest method. The
unamortized amounts are included in deposits and other assets in the Consolidated Balance Sheets and were $0.3 million and $0.6
million at December 27, 2011 and December 28, 2010, respectively.
Revenue Recognition
The Company records revenues from bakery-cafe sales upon delivery of the related food and other products to the customer.
Revenues from fresh dough and other product sales to franchisees are recorded upon delivery to the franchisees. Sales of soup
and other branded products outside of our bakery-cafes are recognized upon delivery to customers.
The Company records a liability 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.
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 an Area Development Agreement (“ADA”).
Of this fee, $5,000 is generally paid at the time of the signing of the ADA and is recognized as revenue when it is received as it
is non-refundable and the Company has 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. Franchise fees were
$2.3 million, $1.4 million, and $1.2 million for the fiscal years ended December 27, 2011, December 28, 2010, and December 29,
2009, respectively. Royalties are generally paid weekly based on the percentage of franchisee sales specified in each ADA (generally
4 percent to 5 percent of net sales). Royalties are recognized as revenue when they are earned. Royalties were $90.5 million, $84.8
million, and $77.1 million for the fiscal years ended December 27, 2011, December 28, 2010, and December 29, 2009, respectively.
The Company maintains a customer loyalty program referred to as MyPanera® in which Panera Bread Company customers earn
rewards based on registration in the program and purchases within Panera Bread bakery-cafes. The Company records the full retail
value of loyalty program rewards as a reduction of net bakery-cafe sales and a liability is established within accrued expenses in
the Consolidated Balance Sheets as rewards are earned while considering historical redemption rates. Fully earned rewards expire