El Pollo Loco 2016 Annual Report Download - page 42

Theseassumptionsusedinourestimatesoffairvaluearegenerallyconsistentwithpastperformanceandarealsoconsistentwiththeprojectionsandassumptions
thatweuseinourforward-lookingoperatingplans.Theseassumptionsaresubjecttochangeasaresultofchangingeconomicandcompetitiveconditions.Changes
intheseestimatesandassumptionscouldmateriallyaffectourdeterminationsoffairvalueandimpairment.
Long-Lived Assets
Westatethevalueofourpropertyandequipment,includingprimarilyleaseholdimprovementsandrestaurantequipment,furniture,andfixtures,atcost,minus
accumulateddepreciationandamortization.Wecalculatedepreciationusingthestraight-linemethodofaccountingovertheestimatedusefullivesoftherelated
assets.Weamortizeourleaseholdimprovementsusingthestraight-linemethodofaccountingovertheshorteroftheleaseterm(includingreasonablyassured
renewalperiods)ortheestimatedusefullivesoftherelatedassets.Weexpenserepairsandmaintenanceasincurred,butcapitalizemajorimprovementsand
betterments.Wemakejudgmentsandestimatesrelatedtotheexpectedusefullivesofthoseassetsthatareaffectedbyfactorssuchaschangesineconomic
conditionsandchangesinoperatingperformance.Ifwechangeourassumptionsinthefuture,wemayberequiredtorecordimpairmentchargesfortheseassets.
Insurance Reserves
Weareresponsibleforworkers’compensation,general,andhealthinsuranceclaimsuptoaspecifiedamount.Wemaintainareserveforestimatedclaimsboth
reportedandincurredbutnotreported,basedonhistoricalclaimsexperienceandotherassumptions.Inestimatingourinsuranceaccruals,weutilizeindependent
actuarialestimatesofexpectedlosses,whicharebasedonstatisticalanalysesofhistoricaldata.Ouractuarialassumptionsarecloselymonitoredandadjustedwhen
warrantedbychangingcircumstances.Shouldclaimsoccurormedicalcostsincreaseingreateramountsthanwehaveexpected,accrualsmaynotbesufficient,and
wemayrecordadditionalexpenses.
Accounting for Lease Obligations
Weleaseasubstantialnumberofourrestaurantproperties.Attheinceptionofeachlease,weevaluatethepropertyandtheleasetodeterminewhethertheleaseis
anoperatingleaseoracapitallease.Thisleaseaccountingevaluationmayrequiresignificantjudgmentindeterminingthefairvalueandusefullifeoftheleased
propertyandtheappropriateleaseterm.Theleasetermusedfortheevaluationincludesrenewaloptionperiodsonlyininstancesinwhichtheexerciseofthe
renewaloptioncanbereasonablyassuredbecausefailuretoexercisesuchanoptionwouldresultinaneconomicpenalty.Suchaneconomicpenaltywould
typicallyresultfromourhavingtoabandonabuildingorfixturewithremainingeconomicvalueuponvacatingaproperty.
Franchise Operations
Wesubleaseanumberofrestaurantpropertiestoourfranchisees.Assuch,weremainprincipallyliablefortheunderlyingleases.Ifsalestrendsoreconomic
conditionsworsenforourfranchisees,theirfinancialhealthmayworsen,ourcollectionratesmaydecline,andwemayberequiredtoassumetheresponsibilityfor
additionalleasepaymentsonwhatarepresentlyfranchisedrestaurants.
Income Taxes
Weusetheassetandliabilitymethodofaccountingforincometaxes.Deferredtaxassetsandliabilitiesaredeterminedbasedontemporarydifferencesbetweenthe
financialcarryingamountsandthetaxbasisofassetsandliabilitiesusingenactedtaxratesineffectintheyearsinwhichthetemporarydifferencesareexpectedto
reverse.AsofDecember30,2015,wehadfederalandstatenetoperatingloss(“NOL”)carryforwardsof$105.2millionand$93.6million,respectively.These
FederalandStateNOLsexpirebeginningin2028and2025,respectively.
Avaluationallowanceisrequiredwhenthereissignificantuncertaintyastotherealizabilityofdeferredtaxassets.Theabilitytorealizedeferredtaxassetsis
dependentuponourabilitytogeneratesufficienttaxableincomewithinthecarryforwardperiodsprovidedforinthetaxlawforeachtaxjurisdiction.Wehave
consideredthefollowingpossiblesourcesoftaxableincomewhenassessingtherealizationofourdeferredtaxassets:
·futurereversalsofexistingtaxabletemporarydifferences;
·futuretaxableincomeorloss,exclusiveofreversingtemporarydifferencesandcarryforwards;
·tax-planningstrategies;and
·taxableincomeinpriorcarrybackyears.
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