Panera Bread 2012 Annual Report Download - page 42

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Income Taxes
We are subject to income taxes in the United States and Canada. Significant judgment is required in evaluating our uncertain tax
positions and determining our provision for income taxes. We assess the income tax position and record the liabilities for all years
subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting
date.
Our provision for income taxes is determined in accordance with the accounting guidance for income taxes. Under this method,
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 basis. Deferred tax assets and liabilities are
measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is recognized if we determine it is more likely than
not that all or some portion of the deferred tax asset will not be recognized. At December 25, 2012, we recorded a valuation
allowance related to net operating loss carryforwards of our Canadian operations of $1.8 million. No valuation allowance was
recorded against deferred tax assets during the fiscal years ended December 27, 2011 and December 28, 2010, respectively.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given the final tax outcome
of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing
of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is
different than the amounts recorded, such differences will impact our provision for income taxes in the period in which such
determination is made. Our provision for income taxes includes the impact of reserve provisions and changes to reserves that are
considered appropriate, as well as the related net interest.
Our effective tax rates have differed from the statutory tax rate primarily due to the impact of state taxes, partially offset by
favorable U.S. rules related to donations of inventory to charitable organizations and domestic manufacturing. Our future effective
tax rates could be adversely affected by changes in the valuation of our deferred tax assets, or changes in tax laws, regulations,
accounting principles, or interpretations thereof. In addition, we are subject to the continuous examination of our income tax
returns and other tax filings by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse
outcomes resulting from these examinations to determine the adequacy of our reserve for income taxes.
Lease Obligations
We lease nearly all of our bakery-cafes, fresh dough facilities and trucks, and support centers. Each lease is evaluated to determine
whether the lease will be accounted for as an operating or capital lease. The term used for this evaluation includes renewal option
periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option
would result in an economic penalty.
For leases that contain rent escalations, we record the total rent payable during the lease term, as described above, on a straight-
line basis over the term of the lease, and record the difference between the minimum rent paid and the straight-line rent as a lease
obligation. Many of our leases contain provisions that require additional rental payments based upon net bakery-cafe sales volume
or changes in external indices, which we refer to as contingent rent. Contingent rent is accrued each period as the liability is
incurred, in addition to the straight-line rent expense noted above. This results in variability in occupancy expense over the term
of the lease in bakery-cafes where we pay contingent rent.
In addition, we record landlord allowances for non-structural tenant improvements as deferred rent, which is included in accrued
expenses or deferred rent in the Consolidated Balance Sheets based on their short-term or long-term nature. These landlord
allowances are amortized over the reasonably assured lease term as a reduction of rent expense. Additionally, we record landlord
allowances for structural tenant improvements as reduction in depreciation expense. Leasehold improvements are amortized using
the straight-line method over the shorter of their estimated useful lives or the related reasonably assured lease term.
Management makes judgments regarding the probable term for each lease, which can impact the classification and accounting for
a lease as capital or operating, the rent holiday, and/or escalations in payments that are taken into consideration when calculating
straight-line rent and the term over which leasehold improvements for each bakery-cafe, fresh dough facility, and support center
is amortized. These judgments may produce materially different amounts of depreciation, amortization, and rent expense than
would be reported if different assumed lease terms were used.