Papa Johns 2010 Annual Report Download - page 38

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recognized for the estimated future effects of tax loss carryforwards. The effect on deferred taxes of
changes in tax rates is recognized in the period in which the enactment date changes. As a result, our
effective tax rate may fluctuate. Valuation allowances are established when necessary on a jurisdictional
basis to reduce deferred tax assets to the amounts we expect to realize.
As of December 26, 2010, we had a net deferred income tax asset balance of $9.3 million. We have not
provided a valuation allowance for the deferred income tax assets associated with our domestic
operations since we believe it is more likely than not that future earnings will be sufficient to ensure the
realization of the net deferred income tax assets for federal and state purposes.
Certain tax authorities periodically audit the Company. We provide reserves for potential exposures. We
evaluate these issues on a quarterly basis to adjust for events, such as court rulings or audit settlements,
which may impact our ultimate payment for such exposures. We recognized reductions of $550,000,
$1.2 million and $1.7 million in our customary income tax expense associated with the finalization of
certain income tax issues in 2010, 2009 and 2008, respectively (see “Note 13” of “Notes to Consolidated
Financial Statements”).
Consolidation of BIBP Commodities, Inc. (“BIBP”) as a Variable Interest Entity
BIBP is a franchisee-owned corporation that conducts a cheese-purchasing program on behalf of
domestic Company-owned and franchised restaurants. We consolidate the financial results of BIBP,
since we are deemed the primary beneficiary, as defined, of BIBP. We recognized pre-tax income of
approximately $21.0 million during 2010 (including a reduction in BIBP’s cost of sales of $14.2 million
as discussed below), $22.5 million during 2009 and a pre-tax loss of $10.5 million during 2008 from the
consolidation of BIBP.
BIBP had an accumulated deficit (representing prior purchases of cheese by PJ Food Service, Inc.
(“PJFS”) from BIBP at below market prices) of $14.2 million at December 26, 2010. PJFS agreed to pay
to BIBP the amount equal to the accumulated deficit at December 26, 2010. Accordingly, BIBP recorded
a decrease of $14.2 million in cost of sales and PJFS recorded a corresponding increase in cost of sales.
This transaction did not have any impact on the Company’s 2010 consolidated income statement results
since both PJFS and BIBP are fully consolidated.
As of February 15, 2011, substantially all of our domestic franchisees have entered into a cheese
purchasing agreement with the Company. The cheese purchasing agreement requires participating
domestic franchisees to commit to purchase cheese through PJFS, or to pay the franchisee’s portion of
any accumulated cheese liability upon ceasing to purchase cheese from PJFS when a liability exists.
Accordingly, beginning in 2011, the consolidation of BIBP, or a similarly structured program, will no
longer have a significant impact on our consolidated statements of income.
Fair Value Measurements and Disclosures
The Fair Value Measurements and Disclosures topic of the Accounting Standards Codification (“ASC”)
requires companies to determine fair value based on the price that would be received to sell the asset or
paid to transfer the liability to a market participant. The Fair Value Measurements and Disclosures topic
emphasizes that fair value is a market-based measurement, not an entity-specific measurement. The new
guideline required a phase-in approach: (1) phase one was effective for financial assets and liabilities in
our first quarter of 2008 and (2) phase two was effective for non-financial assets and liabilities in our
first quarter of fiscal 2009. The new provisions did not have a significant impact on our 2008 or 2009
financial statements.