Cracker Barrel 2014 Annual Report Download - page 27

However, if actual results are not consistent with our estimates
and assumptions used in estimating future cash ows and
fair values of long-lived assets, we may be exposed to losses
that could be material.
Insurance Reserves
We self-insure a signicant portion of our expected workers’
compensation and general liability programs. We purchase
insurance for individual workers’ compensation claims that
exceed $250, $500 or $1,000 depending on the state in which
the claim originates. We purchase insurance for individual
general liability claims that exceed $500. We record a reserve
for workers’ compensation and general liability for all
unresolved claims and for an estimate of incurred but not
reported claims (“IBNR”). ese reserves and estimates of
IBNR claims are based upon a full scope actuarial study
which is performed annually at the end of our third quarter
and is adjusted by the actuarially determined losses and actual
claims payments for the fourth quarter. Additionally, we
perform limited scope actuarial studies on a quarterly basis to
verify and/or modify our reserves. e reserves and losses
in the actuarial study represent a range of possible outcomes
within which no given estimate is more likely than any other
estimate. As such, we record the losses in the lower end of
that range and discount them to present value using a risk-free
interest rate based on projected timing of payments. We
also monitor actual claims development, including incurrence
or selement of individual large claims during the interim
periods between actuarial studies as another means of
estimating the adequacy of our reserves.
Our group health plans combine the use of self-insured and
fully-insured programs. Benets for any individual (employee
or dependents) in the self-insured group health program are
limited. We record a liability for the self-insured portion of
our group health program for all unpaid claims based upon a
loss development analysis derived from actual group health
claims payment experience. We also record a liability for
unpaid prescription drug claims based on historical experience.
e fully-insured portion of our health insurance program
contains a retrospective feature which could increase or decrease
premiums based on actual claims experience.
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 dierent 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
is 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 signicant
management judgments and estimates, including initial
markons, markups, markdowns and shrinkage, which may
signicantly 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.
25