Cracker Barrel 2004 Annual Report Download - page 43

CRITICAL ACCOUNTING POLICIES
The Company prepares its Consolidated Financial Statements in conformity with GAAP. The preparation of
these financial statements requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period (see Note 3 to the
Company's Consolidated Financial Statements). Actual results could differ from those estimates. Critical accounting
policies are those that management believes are both most important to the portrayal of the Company's financial
condition and operating results, and require management's most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company
bases its estimates on historical experience, outside advice from parties believed to be experts in such matters, and
on various other assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from
other sources. Judgments and uncertainties affecting the application of those policies may result in materially
different amounts being reported under different conditions or using different assumptions. The Company considers
the following policies to be most critical in understanding the judgments that are involved in preparing its
Consolidated Financial Statements.
IMPAIRMENT OF LONG-LIVED ASSETS AND PROVISION FOR ASSET DISPOSITIONS
The Company assesses the impairment of identifiable intangibles, long-lived assets and goodwill whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability of
assets is measured by comparing the carrying value of the asset to the future cash flows expected to be generated
by the asset. If the total expected future cash flows were less than the carrying amount of the asset, the carrying
amount is written down to the estimated fair value, and a loss resulting from impairment is recognized by a charge
to earnings. Judgments and estimates made by the Company related to the expected useful lives of long-lived
assets are affected by factors such as changes in economic conditions and changes in operating performance. As
the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these
factors could cause the Company to realize a material impairment charge. From time to time the Company has
decided to exit from or dispose of certain operating units. Typically such decisions are made based on operating
performance or strategic considerations and must be made before the actual costs of proceeds of disposition are
known, and management must make estimates of these outcomes. Such outcomes could include the sale of a
property or leasehold, mitigating costs through a tenant or subtenant, or negotiating a buyout of a remaining lease
term. In these instances management evaluates possible outcomes, frequently using outside real estate and legal
advice, and records in the financial statements provisions for the effect of such outcomes. The accuracy of such
provisions can vary materially from original estimates, and management regularly monitors the adequacy of the
provisions until final disposition occurs. In addition, at least annually, the Company assesses the recoverability of
goodwill and other intangible assets related to its restaurant concepts with assistance from an outside expert. The
impairment tests require the Company to estimate fair values of its restaurant concepts by making assumptions
regarding future cash flows and other factors. This valuation may reflect, among other things, such external factors
as capital market valuation for public companies comparable to the operating unit. If these assumptions change in
the future, or if operating performance declines, the Company may be required to record impairment charges for
these assets and such charges could be material.
INSURANCE RESERVES
The Company self-insures a significant portion of expected losses under its workers’ compensation, general
liability and health insurance programs. The Company has purchased insurance for individual claims that exceed
$250 for workers’ compensation and general liability insurance prior to 2003, but increased this amount to $500 for
2003 and to $1,000 for certain coverages for 2004 going forward. The Company has decided not to purchase such
insurance for its primary group health program, but its offered benefits are limited to not more than $1,000 during
the lifetime of any employee (including dependents) in the program. The Company records a liability for workers’
compensation and general liability for all unresolved claims and for an actuarially determined estimate of incurred
but not reported claims at the anticipated cost to the Company as of the end of the Company’s third quarter and
adjusting it by the actuarially determined losses and actual claims payments for the fourth quarter. Those reserves
and losses are determined actuarially from a range of possible outcomes within which no given estimate is more
likely than any other estimate. In accordance with SFAS No. 5, “Accounting for Contingencies,” the Company
records the losses at the low end of that range and discounts them to present value using a risk-free interest rate
based on actuarially projected timing of payments. The Company records a liability for its group health program for
all unpaid claims based primarily upon a loss development analysis derived from actual group health claims
payment experience provided by the Company’s third party administrator. The Company's accounting policies
regarding insurance reserves include certain actuarial assumptions or management judgments regarding economic
conditions, the frequency and severity of claims and claim development history and settlement practices.
Unanticipated changes in these factors may produce materially different amounts of expense that would be reported
under these insurance programs.