Cracker Barrel 2005 Annual Report Download - page 56

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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.
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 amor-
tization 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
valuation specialist in the second quarters of 2004
and 2005, and concluded that there was no current
indication of impairment. This annual assessment
is performed in the second quarter of each year.
Additionally, an assessment is performed between
annual assessments if an event occurs or circumstances
change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount.
Revenue recognition – The Company records
revenue from the sale of products as they are sold.
The Company provides for estimated returns based on
return history and sales levels. Initial fees received
from a franchisee to establish a new franchise are
recognized as income when the Company has performed
all of its obligations required to assist the franchisee
in opening a new franchise restaurant, which is gener-
ally upon the opening of that restaurant. Continuing
royalties, which are a percentage of net sales
of franchised restaurants, are accrued as income
when earned.
Unredeemed Gift Cards and Certificates – Unredeemed
gift cards and certificates represent a liability of the
Company related to unearned income and are recorded
at their expected redemption value. When gift cards
and certificates are redeemed, the Company recognizes
revenue and reduces the liability. For those states
that exempt gift cards and certificates under their
escheat laws, in the quarter of the gift card and
certificate sale, the Company estimates the percentage
of the ultimate unredeemed gift cards and certificates
sold that quarter and reduces its liability and records
revenue accordingly. The Company does not reduce
its liability for unredeemed gift cards and certificates
that will eventually be remitted to the states under
their escheat laws, until such time the gift cards and
certificates are remitted to the state. For those states
the Company estimates the ultimate unredeemed gift
cards and certificates of the remaining balances and
reduces its liability by the actual cash remitted to the
state, which is less than the remaining due to
administrative fees permitted to be deducted by the