Chipotle 2012 Annual Report Download - page 49

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 is the lesser of 20 years inclusive of
reasonably assured renewal periods, or 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 provided the achievement of that target is considered probable.
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
Financial Accounting Standards Board Accounting Standard Codification 820, Fair Value of Measurements
and Disclosures (“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.
Foreign Currency Translation
The Company’s international operations generally use the local currency as the functional currency. Assets
and liabilities are translated at exchange rates in effect as of the balance sheet date. Income and expense accounts
are translated at the average monthly exchange rates during the year. Resulting translation adjustments are
recorded as a separate component of accumulated other comprehensive income in the consolidated statement of
shareholders’ equity.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily
of cash and cash equivalents and investments. Approximately half of the Company’s cash and investment
balances are not federally backed or federally insured. Credit card transactions at the Company’s restaurant are
processed by one service provider.
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Annual Report