Buffalo Wild Wings 2010 Annual Report Download - page 26

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in making the accruals. We estimate future lease obligations based on these factors and evaluate quarterly the adequacy of the
estimated reserve based on current market conditions. During 2010, 2009, and 2008, we recorded reserves of $310,000,
$31,000, and $85,000, respectively, for restaurants that closed.
Goodwill
We review goodwill for impairment annually, or whenever circumstances change in a way which could indicate that
impairment may have occurred. Goodwill is tested at the reporting unit level.
We identify potential goodwill impairments by comparing the fair value of the reporting unit to its carrying amount,
which includes goodwill and other intangible assets. The fair value of the reporting unit is calculated using a combination of
the income and market approaches. This amount is compared to the carrying value of the entity, including goodwill.
If the carrying amount of the reporting unit exceeds the fair value, this is an indication that impairment may exist.
We calculate the amount of the impairment by comparing the implied fair value of the assets and liabilities of the reporting
unit with the carrying amount. The fair value of the reporting unit in excess of the value of the assets and liabilities is the
implied fair value of the goodwill. If this amount is less than the carrying amount of goodwill, impairment is recognized for
the difference. As of December 26, 2010, our analysis of the fair value of our goodwill substantially exceeded the carrying
value and therefore we concluded that our goodwill was not impaired. No goodwill impairment charges were recognized
during 2010, 2009, or 2008.
Vendor Allowances
Vendor allowances include allowances and other funds received from vendors. Certain of these funds are determined
based on various quantitative contract terms. We also receive vendor allowances from certain manufacturers and distributors
calculated based upon purchases made by franchisees. Amounts that represent a reimbursement of costs incurred, such as
advertising, are recorded as a reduction of the related expense. Amounts that represent a reduction of inventory purchase
costs are recorded as a reduction of inventoriable costs. We record an estimate of earned vendor allowances that are
calculated based upon monthly purchases. We generally receive payment from vendors approximately 30 days after the end
of a month for that month’s purchases. During fiscal 2010, 2009, and 2008, vendor allowances were recorded as a reduction
in inventoriable costs, and cost of sales was reduced by $6.4 million, $6.0 million, and $5.2 million, respectively.
Revenue Recognition — Franchise Operations
Our franchise agreements have terms ranging from 10 to 20 years. These agreements also convey extension terms of
5 or 10 years depending on contract terms and if certain conditions are met. We provide training, preopening assistance and
restaurant operating assistance in exchange for area development fees, franchise fees and royalties of 5% of the franchised
restaurant’s sales. Franchise fee revenue from individual franchise sales is recognized upon the opening of the restaurant
when we have performed all of our material obligations and initial services. Area development fees are dependent upon the
number of restaurants granted in the agreement as are our obligations under the area development agreement. Consequently,
as our obligations are met, area development fees are recognized in relation to the expenses incurred with the opening of each
new restaurant and any royalty-free periods. Royalties are accrued as earned and are calculated each period based on reported
franchisees’ sales.
Self-Insurance Liability
We are self-insured for a significant portion of our risks and associated liabilities with respect to workers’
compensation, general liability, and employee health benefits. The accrued liabilities associated with these programs are
based on our estimate of the ultimate costs to settle known claims as well as claims that may have arisen but have not yet
been reported to us as of the balance sheet date. Our estimated liabilities are not discounted and are based on information
provided by our insurance brokers and insurers, combined with our judgments regarding a number of assumptions and
factors, including the frequency and severity of claims, and claims development history. We maintain stop-loss coverage with
third-party insurers to limit our total exposure for each of these programs. Significant judgment is required to estimate claims
incurred but not reported as parties have yet to assert such claims. If actual claims trends, including the frequency or severity
of claims, differ from our estimates, our financial results could be impacted.
Stock-Based Compensation
We account for stock-based compensation in accordance with the fair value recognition provisions, under which we
use the Black-Scholes-Merton pricing model, which requires the input of subjective assumptions. These assumptions include