Cracker Barrel 2004 Annual Report Download - page 51

indicate that the carrying amount of an asset may not be recoverable. An impairment is determined by comparing
estimated undiscounted future operating cash flows to the carrying amounts of assets on a location by location basis. If
an impairment exists, the amount of impairment is measured as the sum of the estimated discounted future operating
cash flows of such asset and the expected proceeds upon sale of the asset less its carrying amount. If applicable,
assets held for sale are reported at the lower of carrying amount or fair value less costs to sell.
Operating leases – The Company has ground leases and office space leases that are recorded as
operating leases. Most of the leases have rent escalation clauses and some have rent holiday and contingent rent
provisions. In accordance with FASB Technical Bulletin (“FTB”) No. 85-3, “Accounting for Operating Leases with
Scheduled Rent Increases,” the liabilities under these leases are recognized on the straight-line basis over the
shorter of the useful life, with a maximum of 35 years, or the related lease life. The Company uses a lease life that
generally begins on the date that the Company becomes legally obligated under the lease, including the pre-opening
period during construction, when in many cases the Company is not making rent payments, and generally extends
through certain of the renewal periods that can be exercised at the Company’s option, for which at the inception of
the lease, it is reasonably assured that the Company will exercise those renewal options.
Certain leases provide for rent holidays, which are included in the lease life used for the straight-line rent
calculation in accordance with FTB No. 88-1, “Issues Relating to Accounting for Leases.” Rent expense and an
accrued rent liability are recorded during the rent holiday periods, during which the Company has possession of and
access to the property, but is not required or obligated to, and normally does not, make rent payments.
Certain leases provide for contingent rent, which is determined as a percentage of gross sales in excess of
specified levels. The Company records a contingent rent liability and corresponding rent expense when sales have
been achieved in amounts in excess of the specified levels.
The same lease life is used for reporting future minimum lease commitments as is used for the straight-line
rent calculation. The Company uses a lease life that extends through certain of the renewal periods that can be
exercised at the Company’s option.
Advertising – The Company expenses the costs of producing advertising the first time the advertising takes
place. Net advertising expense was $38,442, $39,782 and $37,423 for 2004, 2003 and 2002, respectively.
Insurance – 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 has
increased this amount to $500 for 2003 and $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. The 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 Statement of Financial Accounting
Standards (“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.
Goodwill –- Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets
from the acquisition of Logan’s in 1999. Effective August 4, 2001, the Company elected early adoption of SFAS No.
142, “Goodwill and Other Intangible Assets.” SFAS No. 142 eliminated the amortization for goodwill and other
intangible assets with indefinite lives. Intangible assets with lives restricted by contractual, legal, or other means will
continue to be amortized over their useful lives. Goodwill and other intangible assets not subject to amortization are
tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might
be impaired. SFAS No. 142 requires a two-step process for testing impairment. First, the fair value of each reporting
unit is compared to its carrying value to determine whether an indication of impairment exists. This valuation may
reflect, among other things, such external factors as capital market valuation for public companies comparable to
the operating unit. If an impairment is indicated, then the implied fair value of the reporting unit’s goodwill is determined
by allocating the unit’s fair value to its assets and liabilities (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination. The amount of impairment for goodwill and other
intangible assets is measured as the excess of its carrying value over its implied fair value. The Company conducted
the initial test of the carrying value of its goodwill, as required by SFAS No. 142, during the second quarter of 2002 and
concluded that there was no current indication of impairment to goodwill. The Company performed its annual
assessment with assistance from an outside expert in the second quarters of 2003 and 2004, and concluded that
there was no current indication of impairment. This annual assessment is performed in the second quarter of each