Panera Bread 2013 Annual Report Download - page 59

PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
51
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 option awards, fair value is determined using the Black-Scholes option pricing model, while restricted stock is valued using
the closing stock price on the date of grant. The Black-Scholes option pricing model requires the input of subjective assumptions.
These assumptions include estimating the expected term until the option awards are 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 option awards expected term, and the dividend yield based on the Company’s anticipated dividend payout
over the expected term of the option awards. These assumptions are evaluated and revised, as necessary, to reflect market conditions
and historical experience. Stock-based compensation expense is recognized only for those awards expected to vest, with forfeitures
estimated at the date of grant based on historical experience. The fair value of the awards expected to vest is amortized over the
vesting period. Options and restricted stock generally vest 25 percent after two years and thereafter 25 percent each year for the
next three years and options generally have a six-year term. Stock-based compensation expense is included in general and
administrative expenses in the Consolidated Statements of Comprehensive Income.
Asset Retirement Obligations
The Company recognizes the future cost to comply with lease obligations at the end of a lease as it relates to tangible long-lived
assets in accordance with the accounting standard for the asset retirement and environmental obligations ("ARO") in the Company’s
consolidated financial statements. Most lease agreements require the Company to restore the leased property to its original
condition, including removal of certain long-lived assets the Company has installed, at the end of the lease. A liability for the fair
value of an asset retirement obligation along with a corresponding increase to the carrying value of the related long-lived asset is
recorded at the time a lease agreement is executed. The Company amortizes the amount added to property and equipment, net
and recognizes accretion expense in connection with the discounted liability over the reasonably assured lease term. The estimated
liability is based on the Company’s historical experience in closing bakery-cafes, fresh dough facilities, and support centers and
the related external cost associated with these activities. Revisions to the liability could occur due to changes in estimated retirement
costs or changes in lease terms. As of December 31, 2013 and December 25, 2012, the Company's net ARO asset included in
property and equipment, net was $4.6 million and $4.6 million, respectively, and its net ARO liability included in other long-term
liabilities was $10.2 million and $9.2 million, respectively. ARO accretion expense was $0.6 million, $0.4 million, and $0.3
million for the fiscal years ended December 31, 2013, December 25, 2012, and December 27, 2011, respectively.
Variable Interest Entities
The Company applies the guidance issued by the FASB on accounting for variable interest entities (“VIE”), which defines the
process for how an enterprise determines which party consolidates a VIE as primarily a qualitative analysis. The enterprise that
consolidates the VIE (the primary beneficiary) is defined as the enterprise with (1) the power to direct activities of the VIE that
most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive
benefits from the VIE. The Company does not possess any ownership interests in franchise entities or other affiliates. The franchise
agreements are designed to provide the franchisee with key decision-making ability to enable it to oversee its operations and to
have a significant impact on the success of the franchise, while the Company’s decision-making rights are related to protecting
its brand. Based upon its analysis of all the relevant facts and considerations of the franchise entities and other affiliates, the
Company has concluded that these entities are not variable interest entities and they have not been consolidated as of the fiscal
year ended December 31, 2013.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic
740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists”. This guidance requires an unrecognized tax benefit related to a net operating loss carryforward, a similar
tax loss or a tax credit carryforward to be presented as a reduction to a deferred tax asset, unless the tax benefit is not available at
the reporting date to settle any additional income taxes under the tax law of the applicable tax jurisdiction. The guidance is effective
for fiscal years and interim periods beginning after December 15, 2013, with early adoption permitted. The adoption of this
guidance is not expected to have a material effect on the Company's consolidated financial statements.
3. Business Combinations and Divestitures
Florida Bakery-cafe Acquisition
On April 9, 2013, the Company acquired substantially all the assets of one bakery-cafe from its Hallandale, Florida franchisee for
a purchase price of $2.7 million. The Company paid approximately $2.4 million of the purchase price on April 9, 2013 and retained