Cracker Barrel 2005 Annual Report Download - page 45

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existed with respect to a Cracker Barrel store that was
approved to relocate to a stronger site in the same
market and recorded a charge of $431. 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. 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 $500 for 2003 and to $1,000 for certain
coverages for 2004, 2005 and 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 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 develop-
ment history and settlement practices. Changes in
these factors in the future may produce materially
different amounts of expense that would be reported
under these insurance programs.
TAX PROVISION
The Company must make estimates of certain items
that comprise its income tax provision. These esti-
mates include employer tax credits for items such as
FICA taxes paid on employee tip income, Work
Opportunity and Welfare to Work credits, as well as
estimates related to certain depreciation and capitaliza-
tion policies. These estimates are made based on the
best available information at the time of the pro-
vision and historical experience. The Company files its
income tax returns many months after its year end.
These returns are subject to audit by various federal
and state governments years after the returns are filed
and could be subject to differing interpretations
of the tax laws. The Company then must assess the
likelihood of successful legal proceedings or reach a
settlement, either of which could result in material
adjustments to the Company’s Consolidated Financial
Statements and its consolidated financial position.