Cracker Barrel 2006 Annual Report Download - page 44

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loss resulting from impairment is recognized by a
charge to income. 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 oper-
ating performance. The accuracy of such provisions
can vary materially from original estimates, and
management regularly monitors the adequacy of the
provisions until final disposition occurs.
During 2006, the Company decided to close seven
Cracker Barrel stores and three Logan’s restaurants,
which resulted in impairment charges and store closing
costs of $8,052. Initially these impairments were
recorded based upon the lower of each unit’s carrying
amount or fair value. The units’ fair values were largely
determined based upon estimates provided by third-
party appraisers using market comparables. The impaired
locations were closed in February 2006 and were
classified at that time as held for sale and were remea-
sured at their fair values less the costs to sell. The
locations were closed due to weak financial performance,
an unfavorable outlook, and relatively positive
prospects for proceeds from disposition for certain
locations. Additionally, during 2006 the Company
recorded an impairment of $838 on its Cracker Barrel
management trainee housing facility. As of July 28,
2006, the Company had sold three Cracker Barrel stores
and one Logan’s restaurant and expects the sale of
the remaining four owned properties to be completed
within one year. The store closing charges included
employee termination benefits, lease termination and
other costs and are included in the impairment and
store closing charges line on the accompanying
Consolidated Statement of Income. The Company also
recorded an impairment loss of $431 in 2005 with
respect to a Cracker Barrel store that was approved to
relocate to a stronger site in the same market.
GOODWILL
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 and $1,000 for certain coverages since
2004. Since 2004, the Company has elected 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 development history and settlement
practices. Changes in these factors in the future may
produce materially different amounts of expense than
would be reported under these insurance programs.