Cracker Barrel 2009 Annual Report Download - page 62

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Derivative instruments and hedging activities – The
Company is exposed to market risk, such as changes in
interest rates and commodity prices. The Company uses
derivative instruments to mitigate its interest rate risk. In
2006, the Company entered into an interest rate swap
which is accounted for as a cash flow hedge (see Note 6).
Many of the food products purchased by the Company
are affected by commodity pricing and are, therefore,
subject to price volatility caused by weather, production
problems, delivery difficulties and other factors that are
outside the control of the Company and generally are
unpredictable. Changes in commodity prices affect the
Company and its competitors generally and, depending on
terms and duration of supply contracts. In many cases,
the Company believes it will be able to pass through some
or much of increased commodity costs by adjusting its
menu pricing. From time to time, competitive circumstances
or judgments about consumer acceptance of price
increases may limit menu price flexibility, and in those
circumstances, increases in commodity prices can result
in lower margins for the Company.
Comprehensive income – Comprehensive income
includes net income and the effective unrealized portion
of the changes in the fair value of the Company’s
interest rate swap.
Segment reporting – Operating segments are
components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate
resources and in assessing performance. Utilizing these
criteria, the Company manages its business on the basis of
one reportable operating segment (see Note 8).
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. The Company’s policy is to present sales
in the Consolidated Statement of Income on a net
presentation basis after deducting sales tax.
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. No revenue is recognized
in connection with the point-of-sale transaction when gift
cards or gift certificates are sold. For those states that
exempt gift cards and certificates from their escheat laws,
the Company makes estimates of the ultimate unredeemed
(“breakage”) gift cards and certificates in the period of the
original sale and amortizes this breakage over the
redemption period that other gift cards and certificates
historically have been redeemed by reducing its liability
and recording revenue accordingly. For those states that do
not exempt gift cards and certificates from their escheat
laws, the Company records breakage in the period that gift
cards and certificates are remitted to the state and reduces
its liability accordingly. Any amounts remitted to states
under escheat or similar laws reduce the Company’s deferred
revenue liability and have no effect on revenue or expense
while any amounts that the Company is permitted to retain
are recorded as revenue. Changes in redemption behavior
or management’s judgments regarding redemption trends in
the future may produce materially different amounts of
deferred revenue to be reported.
Insurance – The Company self-insures a significant
portion of its workers’ compensation, general liability and
health insurance programs. The Company has purchased
insurance for individual workers’ compensation claims
that exceed either $250, $500 or $1,000 depending on
the state in which the claim originates. The Company has
purchased insurance for individual general liability claims
that exceed $500. Prior to January 1, 2009, the Company
did not purchase such insurance for its group health
program, but did limit its offered benefits for any
individual (employee or dependents) in the program to
not more than $1,000 lifetime, and, in certain cases, to
not more than $100 in any given plan year. Beginning
January 1, 2009, the Company split its group health
program into two programs. The first program is self-
insured and limits our offered benefits for any individual
(employee or dependents) in the program to not more
than $100 in any given plan year, and, in certain cases,
to not more than $15 in any given plan year. The second
program is fully insured and as such has no liability for
unpaid claims. The Company records a liability for the
self-insured portion of its group health program for all
unpaid claims based upon a loss development analysis
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