Cracker Barrel 2011 Annual Report Download - page 26

payments for the fourth quarter. e reserves and losses are
determined actuarially from a range of possible outcomes
within which no given estimate is more likely than any other
estimate. As such, we record the actuarially determined losses
at the lower end of that range and discount them to present
value using a risk-free interest rate based on actuarially projected
timing of payments. We also monitor actual claims develop-
ment, including incurrence or selement of individual large
claims during the interim period between actuarial studies
as another means of estimating the adequacy of our reserves.
Our accounting policies regarding insurance reserves
include certain actuarial assumptions and management
judgments regarding economic conditions, the frequency and
severity of claims and claim development history and
selement practices. We have not made any material changes
in the accounting methodology used to establish our
insurance reserves during the past three years and do not believe
there is a reasonable likelihood that there will be a material
change in the estimates or assumptions used to calculate the
insurance reserves. However, changes in these actuarial
assumptions or management judgments in the future may
produce materially different amounts of expense that
would be reported under these insurance programs.
Retail Inventory Valuation
Cost of goods sold includes the cost of retail merchandise
sold at our stores utilizing the retail inventory method
(“RIM”). Under RIM, the valuation of our retail inventories
at cost and the resulting gross margins are calculated by
applying a cost-to-retail ratio to the retail value of our invento-
ries. Inherent in the RIM calculation are certain significant
management judgments and estimates, including initial
markons, markups, markdowns and shrinkage, which may
significantly impact the gross margin calculation as well as the
ending inventory valuation.
Inventory valuation provisions are included for retail
inventory obsolescence and retail inventory shrinkage. Retail
inventory is reviewed on a quarterly basis for obsolescence
and adjusted as appropriate based on assumptions made by
management and judgment regarding inventory aging and
future promotional activities. Cost of goods sold includes an
estimate of shrinkage that is adjusted upon physical inventory
counts. Annual physical inventory counts are conducted
throughout the third and fourth quarters based upon a cyclical
inventory schedule. An estimate of shrinkage is recorded for
the time period between physical inventory counts by using a
three-year average of the physical inventories’ results on a
store-by-store basis.
We have not made any material changes in the methodologies,
estimates or assumptions related to our merchandise
inventories during the past three years and do not believe there
is a reasonable likelihood that there will be a material change
in the estimates or assumptions in the future. However, actual
obsolescence or shrinkage recorded may produce materially
different amounts than we have estimated.
Tax Provision
We must make estimates of certain items that comprise our
income tax provision.ese estimates include effective state
and local income tax rates, 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 capitalization policies.
Our estimates are made based on current tax laws, the best
available information at the time of the provision and
historical experience.
We recognize (or derecognize) a tax position taken or
expected to be taken in a tax return in the financial statements
when it is more likely than not (i.e., a likelihood of more than
fiy percent) that the position would be sustained (or not
sustained) upon examination by tax authorities. A recognized
tax position is then measured at the largest amount of
benefitthat is greater than fiy percent likely of being realized
upon ultimate selement.
We file our income tax returns many months aer our year
end. ese returns are subject to audit by various federal and
state governments years aer the returns are filed and could
be subject to differing interpretations of the tax laws. We then
must assess the likelihood of successful legal proceedings or
reach a selement with the relevant taxing authority.
Although we believe that the judgments and estimates used in
establishing our tax provision are reasonable, an unsuccessful
legal proceeding or a selement could result in material
adjustments to our Consolidated Financial Statements and
our consolidated financial position.
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