Cracker Barrel 2005 Annual Report Download - page 55

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Depreciation expense was $66,687, $62,304 and
$62,552 for 2005, 2004 and 2003, respectively.
Accelerated depreciation methods are generally used
for income tax purposes.
Capitalized interest was $870, $615 and $463 for
2005, 2004 and 2003, respectively.
Gain or loss is recognized upon disposal of property
and equipment, and the asset and related accumulated
depreciation and amortization amounts are removed
from the accounts.
Maintenance and repairs, including the replacement
of minor items, are charged to expense, and major
additions to property and equipment are capitalized.
Impairment of long-lived assets – The Company
evaluates for possible impairment of long-lived assets
and certain identifiable intangibles to be held and
used in the business whenever events or changes in
circumstances indicate that the carrying amount of an
asset may not be recoverable. An impairment is deter-
mined 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 applica-
ble, assets held for sale are reported at the lower of
carrying amount or fair value less costs to sell. During
the third quarter of 2005, the Company determined
that an impairment 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 in other store operating expenses.
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 $44,409,
$38,442 and $39,782 for 2005, 2004 and 2003,
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 $500 for 2003 and
$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 deter-
mined 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