Einstein Bros 2007 Annual Report Download - page 56

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. For intangibles with indefinite lives, the fair value is
compared to the carrying value. The amount of impairment for goodwill and other intangible assets is measured as the excess of its carrying
amount over its fair value. Intangible assets not subject to amortization consist primarily of the Einstein Bros. and Manhattan trademarks.
Intangible assets with lives restricted by contractual, legal or other means are amortized over their useful lives and consist primarily of patents
used in our manufacturing process. Amortization expense is calculated using the straight-line method over the estimated useful lives of
approximately 5 years. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, in accordance with SFAS No. 144.
During the second quarter of fiscal 2004, we began an evaluation of whether each of our brands should be a part of our overall strategic
business plan. As a result of this evaluation, we determined that the Chesapeake brand did not fit within our long-term business model.
Accordingly, we performed an interim impairment analysis and determined that no impairment existed. We also performed a longevity analysis
and determined that the brand had an estimated useful life of four years. The trademarks were previously treated as a non-amortizing intangible and
were reclassified to an amortizing intangible at June 29, 2004. During the second quarter of fiscal 2005, we re-visited the long term strategic fit of
Chesapeake, and as a result we began forming an exit strategy that we believed could be completed within one year. Because there had been a
change in circumstances, it was necessary to review the asset for impairment. The analysis indicated that the carrying amount of the Chesapeake
trademarks was greater than its fair value and accordingly we recorded an impairment charge of $1.2 million during fiscal 2005. As we continued
to work with our remaining franchisees on an exit strategy, we also continued to review the carrying amount of the Chesapeake trademarks in
relation to their fair value. We recorded an additional $0.1 million in impairment charges related to the Chesapeake trademarks during fiscal 2006,
and as of January 2, 2007, there was no remaining value reflected in our consolidated financial statements related to the Chesapeake trademarks.
Our ability to execute an exit strategy is dependent upon the agreement and cooperation of our franchisees and we cannot provide any assurance
that we will be successful in fully completing an exit strategy.
As of January 3, 2006, January 2, 2007 and January 1, 2008, we performed an impairment analysis of the goodwill and indefinite lived
intangible assets related to our Einstein Bros. and Manhattan Bagel brands. For the fiscal years ended 2005, 2006, and 2007 there was no indication
of impairment in our goodwill and indefinite lived intangible assets.
Insurance Reserves
We are self-insured for certain claims related to medical insurance and workers' compensation. We maintain stop loss coverage with third
party insurers to limit our total exposure. The self-insurance liability represents an estimate of the ultimate cost of claims incurred and unpaid as of
the balance sheet date. The estimated liability is established based upon analysis of historical data to ensure that the liability is appropriate. If actual
claims differ from our estimates, our financial results could be impacted. The estimated workers' compensation liability is established based on
actuarial estimates, is discounted at 10% based upon a discrete analysis of actual claims and historical data and is reviewed
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EINSTEIN NOAH RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
on a quarterly basis to ensure that the liability is appropriate. These estimated liabilities are included in accrued expenses in our consolidated
balance sheets.
Guarantees
Prior to 2001, we would occasionally guarantee leases for the benefit of certain of our franchisees. None of the guarantees have been modified
since their inception and we have since discontinued this practice. Current franchisees are the primary lessees under the vast majority of these
leases. Under the lease guarantees, we may be required by the lessor to make all of the remaining monthly rental payments or property tax and
common area maintenance payments if the franchisee does not make the required payments in a timely manner. However, we believe most, if not