El Pollo Loco 2016 Annual Report Download - page 66

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EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restaurant and Franchise Revenue
Revenuesfromtheoperationofcompany-operatedrestaurantsarerecognizedasfoodandbeverageproductsaredeliveredtocustomersandpaymentistenderedat
thetimeofsale.TheCompanypresentssalesnetofsales-relatedtaxesandpromotionalallowances.Promotionalallowancesamountedtoapproximately$7.4
million,$7.2millionand$5.7millionduringtheyearsendedDecember30,2015,December31,2014,andDecember25,2013,respectively.Franchiserevenue
consistsoffranchiseroyalties,initialfranchisefees,licensefeesduefromfranchisees,ITsupportservicesandrentalincomeforleasesandsubleasestofranchisees.
Franchiseroyaltiesarebaseduponapercentageofnetsalesofthefranchiseeandarerecordedasincomeassuchsalesareearnedbythefranchisees.Initial
franchiseandlicensefeesarerecognizedwhenallmaterialobligationshavebeenperformedandconditionshavebeensatisfied,typicallywhenoperationsofthe
franchisedrestauranthavecommenced.InitialfranchisefeesrecognizedduringtheyearsendedDecember30,2015,December31,2014,andDecember25,2013,
totaled$790,000,$631,000,and$521,000,respectively.TheCompanyrecognizesrenewalfeeswhenarenewalagreementwithafranchiseebecomeseffective.
Advertising Costs
Advertisingexpenseisrecordedastheobligationtocontributetotheadvertisingfundiscreated,generallywhentheassociatedrevenueisrecognized.Advertising
expense,whichisacomponentofoccupancyandotheroperatingexpenses,was$13.9million,$13.5millionand$11.9millionfortheyearsendedDecember30,
2015,December31,2014,andDecember25,2013,respectively,andisnetof$18.5million,$17.6millionand$15.8million,respectively,fundedbythe
franchisees’advertisingfees.
FranchiseespayamonthlyfeetotheCompanythatrangesfrom4%to5%oftheirrestaurants’netsalesasreimbursementforadvertising,publicrelationsand
promotionalservicestheCompanyprovides.Feesreceivedinadvanceofprovidedservicesareincludedinotheraccruedexpensesandcurrentliabilitiesandwere
$204,000and$832,000atDecember30,2015andDecember31,2014,respectively.PursuanttoIntermediate’sFranchiseDisclosureDocument,company-
operatedrestaurantscontributetotheadvertisingfundonthesamebasisasfranchisedrestaurants.AtDecember30,2015,theCompanywasobligatedtospendan
additional$79,000infutureperiodstocomplywiththisrequirement.
Productioncostsofcommercials,programmingandothermarketingactivitiesarechargedtotheadvertisingfundswhentheadvertisingisfirstusedforitsintended
purpose,andthecostsofadvertisingarechargedtooperationsasincurred.Totalcontributionsandothermarketingexpensesareincludedingeneral,and
administrativeexpensesintheaccompanyingconsolidatedstatementsofoperations.
Preopening Costs
Preopeningcostsincurredinconnectionwiththeopeningofnewrestaurantsareexpensedasincurred.Preopeningcosts,whichareincludedingeneraland
administrativeexpensesontheaccompanyingconsolidatedstatementsofoperations,were$1.5million,$1.2millionand$0.2millionfortheyearsended
December30,2015,December31,2014,andDecember25,2013,respectively.
Franchise Area Development Fees
TheCompanyreceivesareadevelopmentfeesfromfranchiseeswhentheyexecutemulti-unitareadevelopmentagreements.TheCompanydoesnotrecognize
revenuefromtheagreementsuntiltherelatedrestaurantsopenoratthetimethedevelopmentagreementsexpire,iftherequiredunitsarenotopened.Unrecognized
areadevelopmentfeestotaled$856,000and$486,000atDecember30,2015andDecember31,2014,respectively,andareincludedinotheraccruedexpensesand
currentliabilitiesandothernoncurrentliabilitiesintheaccompanyingconsolidatedbalancesheets.AsofDecember30,2015,theCompanyhadexecuted
developmentagreementsthatrepresentcommitmentstoopen17franchisedrestaurantsatvariousdatesthrough2016.
Gift Cards
TheCompanysellsgiftcardstoitscustomersintherestaurantsandthroughselectedthirdparties.Thegiftcardssoldtocustomershavenostatedexpirationdates
andaresubjecttoactualand/orpotentialescheatmentrightsinseveralofthejurisdictionsinwhichtheCompanyoperates.TheCompanyrecognizesincomefrom
giftcardswhenredeemedbythecustomer.
Operating Leases
RentexpensefortheCompany’soperatingleases,whichgenerallyhaveescalatingrentsoverthetermofthelease,isrecordedonastraight-linebasisoverthe
expectedleaseterm.TheleasetermbeginswhentheCompanyhastherighttocontroltheuseoftheleasedproperty,whichistypicallybeforerentpaymentsare
dueunderthetermsofthelease.Rentexpenseisincludedinoccupancyandother
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