Buffalo Wild Wings 2006 Annual Report Download - page 38

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(h) Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.
The Company purchases its product from a number of suppliers and believes there are alternative suppliers. The
Company has minimum purchase commitments from some of its vendors but the terms of the contracts and nature of the
products are such that purchase requirements do not create a market risk. The primary food product used by Company-
owned and franchised restaurants is fresh chicken wings. Fresh chicken wings are purchased by the Company based on
current market conditions and are subject to fluctuation. Material increases in fresh chicken wing costs may adversely affect
the Company’ s operating results. For fiscal 2006, 2005, and 2004, fresh chicken wings were 24%, 27%, and 34% of
staurant cost of sales, respectively. re
(i) Property and Equipment
Property and equipment are recorded at cost. Leasehold improvements include the cost of improvements funded by
landlord incentives or allowances and during the build-out period leasehold improvements are amortized using the straight-
line method over the lesser of the term of the lease, without consideration of renewal options, or the estimated useful lives of
the assets, which typically range from five to ten years. Furniture and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets, which range from two to eight years. Maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the
spective accounts and the related gains or losses are credited or charged to earnings.
re
The Company reviews property and equipment, along with other long-lived assets, quarterly to determine if the
carrying value of these assets may not be recoverable based on estimated future undiscounted cash flows. Assets are reviewed
at the lowest level for which cash flows can be identified, which is the individual restaurant level. In determining future cash
flows, significant estimates are made by the Company with respect to future operating results of each restaurant over its
remaining lease term. If such assets are considered impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. Fair value is generally determined by estimated
discounted future cash flows.
(j) Goodwill and Other Assets
Goodwill represents the excess of cost over the fair value of identified net assets of the business acquired. Goodwill
and purchased liquor licenses are subject to an annual impairment analysis. The Company identifies potential impairments by
comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting
unit exceeds the carrying amount, the asset is not impaired. If the carrying amount exceeds the fair value, the Company
calculates the possible impairment by comparing the implied fair value of the asset with the carrying amount. If the implied
value of the asset is less than the carrying amount, a write-down is recorded. In 2005, the Company recorded an impairment
charge of $390 for goodwill not considered recoverable based on estimated discounted future cash flows. The remaining
goodwill was considered recoverable as of December 31, 2006.
Other intangible assets consist primarily of liquor licenses. These licenses are either amortized over their annual
renewal period or, if purchased, are carried at the lower of fair value or cost. The carrying amount of the liquor licenses not
subject to amortization as of December 31, 2006 and December 25, 2005 was $375 and $275, respectively, and is included in
other assets.
(k) Fair Values of Financial Instruments
The carrying value of the Company’ s financial assets and liabilities approximates fair value, because of their short-term
nature.
(l) Asset Retirement Obligations
An asset retirement obligation associated with the retirement of a tangible long-lived asset is recognized as a liability in
the period incurred or when it becomes determinable, with an associated increase in the carrying amount of the related long-
lived asset. The Company must recognize a liability for the fair value of a conditional asset retirement obligation when
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