Chili's 2004 Annual Report Download - page 48

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20
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company has corrected its computation of straight-line rent expense and the
related deferred rent liability. Historically, when accounting for leases with
renewal options, rent expense has been recorded on a straight-line basis over the
initial non-cancelable lease term. Buildings and leasehold improvements on those
properties are depreciated over a period equal to the shorter of the term of the
lease, including option periods provided for in the lease, or the useful life of
the assets. The Company has determined that it should recognize rent expense on a
straight-line basis over sufficient renewal periods to equal or exceed the
depreciable life of the assets, including cancelable option periods where failure
to exercise such options would result in an economic penalty.
The Company also evaluated the accounting of an intangible asset related to
franchise rights acquired in fiscal 1998 and has determined that it would have
been more appropriate to expense the purchase price of the franchise rights.
As a result of the above items, the cumulative effect of the restatement
through fiscal 2004 was an increase in the deferred rent liability of
approximately $20.7 million and a decrease in intangible franchise rights of $4.4
million. In addition, the deferred income tax liability at the end of fiscal 2004
decreased by approximately $9.4 million, and retained earnings at the end of
fiscal 2004 decreased by approximately $15.7 million. The cumulative effect of the
restatement through fiscal 2003 was an increase in the deferred rent liability of
approximately $15.8 million and a decrease in intangible franchise rights of $4.4
million. In addition, the deferred income tax liability at the end of fiscal 2004
decreased by approximately $7.6 million, and retained earnings at the end of
fiscal 2004 decreased by approximately $12.6 million. Rent expense for fiscal
years ended 2002, 2003 and 2004 increased by approximately $3.3 million, $3.9
million and $4.9 million, respectively.
The restatement decreased diluted net earnings per share by approximately
$0.02, $0.02 and $0.03 for the fiscal years ended 2002, 2003 and 2004,
respectively. The restatement does not have any impact on the Company's
previously reported cash flows, sales or comparable store sales or compliance with
any covenant under its credit facility or other debt instruments.