Shake Shack 2015 Annual Report Download - page 61

Table of Contents
SSE HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit, share, per unit and per share amounts)
capitalized as indefinite-
lived intangible assets. Liquor licenses are tested annually and reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. Annual liquor license renewal fees are expensed over the renewal term.
Equity-based Compensation
Equity-based compensation expense is measured based on fair value. We recognize compensation expense on a straight-
line basis over the requisite service period. For awards with
graded-vesting features and service conditions only, compensation expense is recognized on a straight-line basis over the total requisite service period for the entire award. Equity-
based compensation expense is included within general and administrative expenses on the Consolidated Statements of Income.
Leases
We lease all of our domestic company-operated Shacks, our home office and certain equipment under various non-
cancelable lease agreements. Generally, our real estate leases have
initial terms ranging from 10 to 20 years and typically include two five-
year renewal options. At the inception of each lease, we determine its classification as an operating or capital
lease. All of our leases are classified as operating leases and typically provide for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified
thresholds. When the achievement of such sales thresholds is deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period. For operating
leases that include rent holidays and rent escalation clauses, we recognize rent expense on a straight-
line basis over the lease term from the date we take possession of the leased
property. The difference between the straight-
line rent amounts and amounts payable under the lease agreements is recorded as deferred rent and is included as rent expense in
occupancy and related expenses on the Consolidated Statements of Income. Rent expense incurred before a Shack opens is recorded in pre-opening costs. Once a domestic company-
operated Shack opens, we record the straight-line rent expense and any contingent rent, if applicable, in occupancy and related expenses on the Consolidated Statements of Income.
Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in occupancy and related expenses on the
Consolidated Statements of Income.
We expend cash for leasehold improvements and to build out and equip our leased premises. We may also expend cash for structural additions made to leased premises. Generally, a
portion of the leasehold improvements and building costs are reimbursed by our landlords as construction contributions pursuant to agreed-
upon terms in our lease agreements. If
obtained, landlord construction contributions usually take the form of up-
front cash, full or partial credits against our future minimum or contingent rents otherwise payable by us, or a
combination thereof. When contractually due, we classify tenant improvement allowances as deferred rent on the Consolidated Balance Sheets and amortize the tenant improvement
allowances on a straight-line basis over the lease term as a reduction of occupancy costs and related expenses or pre-opening costs .
Revenue Recognition
Revenue consists of Shack sales and licensing revenues. Revenue from Shack sales are presented net of discounts and recognized when food and beverage products are sold. Sales tax
collected from customers is excluded from Shack sales and the obligation is included in sales tax payable until the taxes are remitted to the appropriate taxing authorities. Revenue from
our gift cards are deferred and recognized upon redemption. Licensing revenues include initial territory fees and ongoing licensing fees from all licensed Shacks. Initial territory fees
are recorded as deferred revenue when received and proportionate amounts are recognized as revenue when a licensed Shack is opened and all material services and conditions related
to the fee have been substantially performed. Ongoing licensing fees from these Shacks are based on a percentage of sales and are recognized as revenue as the fees are earned and
become receivable from the licensee.
Income Taxes
We are treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, our taxable income or loss is passed through to and included
in the taxable income of our members. Accordingly, no income tax expense has been recorded for federal and most state and local jurisdictions. We are also subject to withholding
taxes in other foreign jurisdictions but do not have additional filing requirements.
We account for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed for temporary differences between the
consolidated financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the
periods in which the temporary differences are expected to affect taxable income. 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. No valuation allowance was recorded against deferred tax assets during fiscal 2014 and fiscal 2013.
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