Chipotle 2008 Annual Report Download - page 36

Stock-based Compensation
We recognize compensation expense for equity awards over the vesting period based on the award’s fair
value. We use the Black-Scholes valuation model to determine the fair value of our stock options and stock
appreciation rights, which requires assumptions to be made regarding our stock price volatility, the expected life
of the award and expected dividend rates. The volatility assumptions were derived primarily from historical
volatilities of competitors whose shares are traded in the public markets and are adjusted to reflect anticipated
behavior specific to us and our volatility while a public company. Had we arrived at different assumptions of
stock price volatility or expected lives of our options and stock appreciation rights, our stock-based compensation
expense and result of operations could have been different.
Insurance Liability
We maintain various insurance policies for employee health, workers’ compensation, general liability and
property damage. Pursuant to these policies we are either responsible for losses up to certain limits or are self
insured but have third party insurance coverage to limit exposure to these claims. We record a liability that
represents our estimated cost of claims incurred and unpaid as of the balance sheet date. Our estimated liability is
not discounted and is based on a number of assumptions and factors, including historical trends, actuarial
assumptions and economic conditions, and is closely monitored and adjusted when warranted by changing
circumstances. In addition, our history of claims experience is short and our significant growth rate could affect
the accuracy of estimates based on historical experience. Should a greater amount of claims occur compared to
what was estimated or medical costs increase beyond what was expected, our accrued liabilities might not be
sufficient and additional expenses may be recorded. Actual claims experience could also be more favorable than
estimated resulting in expense reductions. Unanticipated changes may produce materially different amounts of
expense than that reported under these programs.
Reserves/Contingencies for Litigation and Other Matters
We are involved in various claims and legal actions that arise in the ordinary course of business. These
actions are subject to many uncertainties, and we cannot predict the outcomes with any degree of certainty.
Consequently, we were unable to ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters as of December 31, 2008 and 2007. Once resolved, however, these actions
may affect our operating results and cash flows.
Sabbatical Liability
We offer our employees a sabbatical leave after each ten years of service they complete. We record a
liability for our estimate of the accumulated sabbatical expense as of the balance sheet date. Our estimated
liability is based on a number of factors including actuarial assumptions and historical trends. Changes in
assumptions and trends could result in a materially different liability and expense.
Unredeemed Gift Card Balances
The Company sells gift cards which do not have an expiration date and it does not deduct non-usage fees
from outstanding gift card balances. The Company recognizes revenue from gift cards when: (i) the gift card is
redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the customer is remote (gift
card breakage) and the Company determines that there is not a legal obligation to remit the unredeemed gift cards
to the relevant jurisdiction. The determination of the gift card breakage rate is based upon company specific
historical redemption patterns. Gift card breakage will be recognized in revenue as the gift cards are used. Gift
card breakage is included in total revenue in the consolidated statement of income. Any future revisions to the
estimated breakage rate may result in changes in the amount of breakage revenue recognized in future periods.
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Annual Report