Chili's 2008 Annual Report Download - page 52

BRINKER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
letter of credit in fiscal 2008. These cash balances have been classified as restricted and are included within
prepaid expenses and other in the consolidated balance sheet as of June 25, 2008 (See Note 6).
Our use of derivative instruments has been primarily related to interest rate swaps which were entered
into with the intent of hedging exposures to changes in value of certain fixed-rate lease obligations. We
record derivative instruments in the consolidated balance sheet at fair value. The accounting for the gain
or loss due to changes in fair value of the derivative instrument depends on whether the derivative
instrument qualifies as a hedge. If the derivative instrument does not qualify as a hedge, the gains or losses
are reported in earnings when they occur. However, if the derivative instrument qualifies as a hedge, the
accounting varies based on the type of risk being hedged. Amounts receivable or payable under interest
rate swaps related to the hedged lease obligations are recorded as adjustments to restaurant expense. Cash
flows related to derivative transactions are included in operating activities.
We entered into interest rate swaps in December 2001 with the intent of hedging exposures to changes
in value of certain fixed-rate lease obligations. These fair value hedges changed the fixed-rate interest
component of an operating lease commitment for certain real estate properties entered into in November
1997 to variable-rate interest. We terminated our interest rate swaps in fiscal 2007 and recorded a
$3.2 million gain, which is included in other gains and charges in the consolidated statements of income. At
June 25, 2008 we do not have any outstanding derivative instruments.
(e) Accounts Receivable
Accounts receivable, net of the allowance for doubtful accounts, represents their estimated net
realizable value. Provisions for doubtful accounts are recorded based on management’s judgment
regarding our ability to collect as well as the age of the receivables. Accounts receivable are written off
when they are deemed uncollectible.
(f) Inventories
Inventories, which consist of food, beverages, and supplies, are stated at the lower of cost (weighted
average cost method) or market.
(g) Property and Equipment
Property and equipment is stated at cost. Buildings and leasehold improvements are depreciated using
the straight-line method over the lesser of the life of the lease, including renewal options, or the estimated
useful lives of the assets, which range from 5 to 20 years. Furniture and equipment are depreciated using
the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years.
Routine repair and maintenance costs are expensed when incurred. Major replacements and
improvements are capitalized.
We evaluate property and equipment held and used in the business for impairment whenever events
or changes in circumstances indicate that the carrying amount of a restaurant’s assets may not be
recoverable. An impairment is determined by comparing estimated undiscounted future operating cash
flows for a restaurant to the carrying amount of its assets. If an impairment exists, the amount of
impairment is measured as the excess of the carrying amount over the estimated discounted future
operating cash flows of the asset and the expected proceeds upon sale of the asset. Assets held for sale are
reported at the lower of the carrying amount or fair value less costs to sell.
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