Papa Johns 2010 Annual Report Download - page 74

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67
2. Significant Accounting Policies (continued)
Leases
Lease expense is recognized on a straight-line basis over the expected life of the lease term. A lease term
often includes option periods, available at the inception of the lease, when failure to renew the lease
would impose a penalty to us. Such penalty may include the recognition of impairment on our leasehold
improvements should we choose not to continue the use of the leased property.
Long-Lived and Intangible Assets
The recoverability of long-lived assets is evaluated if impairment indicators exist. Indicators of
impairment include historical financial performance, operating trends and our future operating plans. If
impairment indicators exist, we evaluate the recoverability of long-lived assets on an operating unit basis
(e.g., an individual restaurant) based on undiscounted expected future cash flows before interest for the
expected remaining useful life of the operating unit. Recorded values for long-lived assets that are not
expected to be recovered through undiscounted future cash flows are written down to current fair value,
which is generally determined from estimated discounted future net cash flows for assets held for use or
estimated net realizable value for assets held for sale.
The recoverability of indefinite-lived intangible assets (i.e., goodwill) is evaluated annually or more
frequently if impairment indicators exist, on a reporting unit basis by comparing the estimated fair value
to its carrying value. Our estimated fair value for Company-owned restaurants is comprised of two
components. The first component is the cash sales price that would be received at the time of the sale and
the second component is an investment in the continuing franchise agreement, representing the
discounted value of future royalties less any incremental direct operating costs, that would be collected
under the ten-year franchise agreement.
During 2008, we sold to domestic franchisees a total of 62 Company-owned restaurants located primarily
in three markets. As part of the sales of these restaurants, we recorded a $3.6 million intangible asset for
the investment in the continuing franchise agreement, representing the discounted value of the royalties
we will receive over the next ten years from the purchaser/franchisee. The intangible asset will be
amortized over the ten-year franchise agreement as a reduction in royalty income of $360,000 annually.
The intangible asset is recorded in other assets in the accompanying consolidated balance sheet at
December 26, 2010 with a remaining value of $2.8 million.
At December 26, 2010, we had a net investment of approximately $20.4 million associated with our
United Kingdom subsidiary (PJUK). During 2008, we recorded a goodwill impairment charge of $2.3
million associated with our PJUK operations (none in 2010 or 2009). We updated our evaluation of the
fair value of our PJUK subsidiary in 2010. Our analysis indicated the fair value exceeded the carrying
value by approximately 10%. The goodwill allocated to this entity approximated $14.7 million at
December 26, 2010. We have plans for PJUK to continue to improve its operating results, including
efforts to increase Papa John’s brand awareness in the United Kingdom, improve sales and profitability
for individual restaurants and increase net PJUK franchised unit openings over the next several years. We
are currently on target to achieve these plans.