Chipotle 2008 Annual Report Download - page 47

Prior to the completion of the Company’s initial public offering, its results of operations were included in
the consolidated federal and state income tax returns of McDonald’s. Upon the completion of the Company’s
initial public offering in January 2006, it exited the consolidated tax group for federal and certain state income
tax purposes. Upon completion of the Disposition in October 2006, the Company exited the McDonald’s
consolidated tax group for the remaining state returns. During the period the Company was included in
McDonald’s consolidated tax returns, the provision for income taxes was calculated on a separate income tax
return basis.
Restaurant Pre-Opening Costs
Pre-opening costs, including rent, wages, benefits and travel for the training and opening teams, food and
other restaurant operating costs, are expensed as incurred prior to a restaurant opening for business.
Insurance Liability
The Company maintains various insurance policies for workers’ compensation, employee health, general
liability and property damage. Pursuant to these policies, the Company is responsible for losses up to certain
limits and is required to estimate a liability that represents the ultimate exposure for aggregate losses below those
limits. This liability is based on management’s estimates of the ultimate costs to be incurred to settle known
claims and claims not reported as of the balance sheet date. The estimated liability is not discounted and is based
on a number of assumptions and factors, including historical trends, actuarial assumptions, and economic
conditions. If actual trends differ from the estimates, the financial results could be impacted.
Advertising Costs
Advertising is expensed as incurred and aggregated $22,053, $18,629 and $13,918 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Rent
Rent expense for the Company’s leases, which generally have escalating rentals over the term of the lease, is
recorded on a straight-line basis over the lease term. The lease term begins when the Company has the right to
control the use of the property, which is typically before rent payments are due under the lease. The difference
between the rent expense and rent paid is recorded as deferred rent in the consolidated balance sheet. Pre-opening
rent is included in pre-opening costs in the consolidated income statement. For the years ended December 31,
2008, 2007, and 2006, $7,088, $5,363, and $3,793 of pre-opening rent was included in pre-opening costs,
respectively. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized
as reductions of rent expense over the term of the lease.
Additionally, certain of the Company’s operating leases contain clauses that provide additional contingent
rent based on a percentage of sales greater than certain specified target amounts. The Company recognizes
contingent rent expense prior to the achievement of the specified target that triggers contingent rent, provided the
achievement of that target is considered probable.
The Company implemented lease management software to perform the calculation of straight-line rent
expense and deferred rent. During the implementation, the Company identified certain adjustments related to its
historical straight-line lease calculations, which were not recognized in its 2005 and prior period consolidated
financial statements. The $2,583 error ($1,583 net of tax, or $0.05 on diluted earnings per share) resulted in the
understatement of occupancy costs over multiple years prior to 2006 and deferred rent. The Company has
determined the misstatement was not material to its financial condition or results of operations for any one year
or to the current year and therefore recorded the adjustment in the fourth quarter of 2008. As the correction
related solely to accounting treatment, it did not effect the Company’s historical or future cash flows or the
timing of payments under the related leases.
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Annual Report