Chipotle 2009 Annual Report Download - page 46

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. 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.
During 2008 the Company completed an implementation of 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 adjustment ($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 determined the adjustment 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.
Fair Value of Financial Instruments
The carrying value of the Company’s cash and cash equivalents, accounts receivable and accounts payable
approximate fair value because of their short-term nature.
Fair Value Measurements
Effective January 1, 2008, the Company adopted Financial Accounting Standards Board Accounting
Standard Codification 820, Fair Value of Measurements and Disclosures (formerly SFAS 157, “Fair Value
Measurements”) (“Topic 820”) for financial assets and liabilities. As permitted, the Company elected to defer
implementation of Topic 820 with regard its non-financial assets and non-financial liabilities until January 1,
2009. Topic 820 defines fair value based on the price that would be received to sell an asset or the exit price that
would be paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to
measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability
to access.
Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar
assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in
markets that are not active; or other inputs that are observable or can be corroborated with observable
market data.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow
methodologies and similar techniques that use significant unobservable inputs.
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Annual Report