Buffalo Wild Wings 2010 Annual Report Download - page 45

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BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 26, 2010 and December 27, 2009
(Dollar amounts in thousands, except per-share amounts)
Sales from company-owned restaurant revenues are recognized as revenue at the point of the delivery of meals and
services. All sales taxes are presented on a net basis and are excluded from revenue.
(o) Franchise Operations
We enter into franchise agreements with unrelated third parties to build and operate restaurants using the Buffalo Wild
Wings brand within a defined geographical area. We believe that franchising is an effective and efficient means to expand the
Buffalo Wild Wings brand. The franchisee is required to operate their restaurants in compliance with their franchise
agreement that includes adherence to operating and quality control procedures established by us. We do not provide loans,
leases, or guarantees to the franchisee or the franchisee’s employees and vendors. If a franchisee becomes financially
distressed, we do not provide any financial assistance. If financial distress leads to a franchisee’s noncompliance with the
franchise agreement and we elect to terminate the franchise agreement, we have the right but not the obligation to acquire the
assets of the franchisee at fair value as determined by an independent appraiser. We receive a 5% royalty of gross sales as
defined in the franchise agreement, and in 2010 allowances directly from the franchisees’ vendors were approximately 0.4%
of the franchisees’ gross sales. We have financial exposure for the collection of the royalty payments. Franchisees generally
remit royalty payments weekly for the prior week’s sales, which substantially minimizes our financial exposure. Historically,
we have experienced insignificant write-offs of franchisee royalties. Franchise and area development fees are paid upon the
signing of the related agreements.
(p) Advertising Costs
Contributions of franchise fees related to the national advertising fund constitute agency transactions and are not
recognized as revenues and expenses. Related advertising obligations are accrued and the costs expensed at the same time the
related revenue is recognized. These advertising fees are recorded as a liability against which specific costs are charged.
Contributions to the national advertising fund related to company-owned restaurants are expensed as contributed and
local advertising costs for company-owned restaurants are expensed as incurred. These costs aggregated $20,415, $17,758,
and $13,503, in fiscal years 2010, 2009, and 2008, respectively.
(q) Preopening Costs
Costs associated with the opening of new company-owned restaurants are expensed as incurred.
(r) Payments Received from Vendors
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 recorded an estimate of earned vendor allowances that are
calculated based upon monthly purchases. We generally receive payment from vendors approximately 30 days from 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 $6,385, $5,985, and $5,192, respectively.
(s) Restricted Assets and System-wide Payables
We have a system-wide marketing and advertising fund. Company-owned and franchised restaurants are required to
remit a designated portion of restaurant sales, to a separate advertising fund that is used for marketing and advertising efforts
throughout the system. That amount was 3% of restaurant sales in all years presented. Certain payments received from
various vendors are deposited into the national advertising fund. These funds are used for development and implementation
of system-wide initiatives and programs. As of December 26, 2010 and December 27, 2009, the national advertising fund
liability was $22,041 and $16,084, respectively.