Papa Johns 2014 Annual Report Download - page 74

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61
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.
Stock-Based Compensation
Compensation expense for equity grants is estimated on the grant date, net of projected forfeitures, and is
recognized over the vesting period (generally in equal installments over three years). Restricted stock is
valued based on the market price of the Company’s shares on the date of grant. Stock options are valued
using a Black-Scholes option pricing model. Our specific assumptions for estimating the fair value of
options are included in Note 18.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturity of three months or less at date of
purchase. These investments are carried at cost, which approximates fair value.
Accounts Receivable
Substantially all accounts receivable are due from franchisees for purchases of food, paper products,
restaurant equipment, printing and promotional items, risk management services, information systems and
related services, and royalties. Credit is extended based on an evaluation of the franchisee’s financial
condition and collateral is generally not required. A reserve for uncollectible accounts is established as
deemed necessary based upon overall accounts receivable aging levels and a specific review of accounts
for franchisees with known financial difficulties. Account balances are charged off against the allowance
after recovery efforts have ceased.
Notes Receivable
The Company provides financing to select franchisees principally for use in the acquisition, construction
and development of their restaurants and for the purchase of restaurants from the Company. Notes
receivable bear interest at fixed or floating rates and are generally secured by the assets of each restaurant
and the ownership interests in the franchise. We establish an allowance based on a review of each
borrower’s economic performance and underlying collateral value. Note balances are charged off against
the allowance after recovery efforts have ceased.
Inventories
Inventories, which consist of food products, paper goods and supplies, smallwares, and printing and
promotional items, are stated at the lower of cost, determined under the first-in, first-out (FIFO) method,
or market.