El Pollo Loco 2016 Annual Report Download - page 67

EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

operatingexpensesontheconsolidatedstatementsofoperations.Thedifferencebetweenrentexpenseandrentpaidisrecordedasdeferredrent,whichisincluded
inothernoncurrentliabilitiesintheaccompanyingconsolidatedbalancesheets.Percentagerentexpensesarerecordedbasedonestimatedsalesorgrossmarginfor
respectiverestaurantsoverthecontingencyperiod.
Anyleaseholdimprovementsthatarefundedbylessorincentivesunderoperatingleasesarerecordedasleaseholdimprovementsandamortizedovertheexpected
leaseterm.Suchincentivesarealsorecordedasdeferredrentandamortizedasreductionstorentexpenseovertheexpectedleaseterm.
Income Taxes
Theprovisionforincometaxes,incometaxespayableanddeferredincometaxesisdeterminedusingtheassetandliabilitymethod.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.Onaperiodicbasis,theCompanyassessestheprobabilitythatitsnetdeferredtax
assets,ifany,willberecovered.Ifafterevaluatingallofthepositiveandnegativeevidence,aconclusionismadethatitismorelikelythannotthatsomeportionor
allofthenetdeferredtaxassetswillnotberecovered,avaluationallowanceisprovidedbyachargetotaxexpensetoreservetheportionofthedeferredtaxassets
whicharenotexpectedtoberealized.
TheCompanyreviewsitsfilingpositionsforallopentaxyearsinallU.S.federalandstatejurisdictionswheretheCompanyisrequiredtofile.
Whenthereareuncertaintiesrelatedtopotentialincometaxbenefits,inordertoqualifyforrecognition,thepositiontheCompanytakeshastohaveatleasta“more
likelythannot”chanceofbeingsustained(basedontheposition’stechnicalmerits)uponchallengebytherespectiveauthorities.Theterm“morelikelythannot”
meansalikelihoodofmorethan50percent.Otherwise,theCompanymaynotrecognizeanyofthepotentialtaxbenefitassociatedwiththeposition.TheCompany
recognizesabenefitforataxpositionthatmeetsthe“morelikelythannot”criterionasthelargestamountoftaxbenefitthatisgreaterthan50percentlikelyof
beingrealizeduponitseffectiveresolution.Unrecognizedtaxbenefitsinvolvemanagement’sjudgmentregardingthelikelihoodofthebenefitbeingsustained.The
finalresolutionofuncertaintaxpositionscouldresultinadjustmentstorecordedamountsandmayaffectourresultsofoperations,financialpositionandcash
flows.
TheCompany’spolicyistorecognizeinterestand/orpenaltiesrelatedtoincometaxmattersinincometaxexpense.TheCompanyhadnoaccrualforinterestor
penaltiesatDecember30,2015andDecember31,2014,respectively,andhasnotrecognizedinterestand/orpenaltiesduringtheyearsendedDecember30,2015,
December31,2014,andDecember25,2013,respectively,sincetherearenomaterialunrecognizedtaxbenefits.Managementbelievesnomaterialchangetothe
amountofunrecognizedtaxbenefitswilloccurwithininthenext12months.
OnJuly30,2014,theCompanyenteredintoanIncomeTaxReceivableAgreement(the“TRA”).TheTRAcallsfortheCompanytopaytoitspre-IPO
stockholders85%ofthesavingsincashthattheCompanyrealizesinitstaxesasaresultofutilizingitsnetoperatinglossesandothertaxattributesattributableto
precedingperiods.InconnectionwiththeTRA,theCompanyhadamendeditsfirstliencreditagreement(the“FirstLienCreditAgreement”)topermitdividend
paymentstotheCompanybyitssubsidiariesinamountsupto$11millionperfiscalyear,nottoexceed$33millionintheaggregate,whiletheFirstLienCredit
Agreementwasoutstanding.Infiscal2014,theCompanyincurredachargeofapproximately$41millionrelatingtothepresentvalueofitstotalexpectedTRA
payments.AsofDecember30,2015,theCompanyhadaccruedexpensesandcurrentliabilitiesof$7.6millionandothernoncurrentliabilitiesof$33.9million
relatingtoexpectedTRApaymentsincludedontheconsolidatedbalancesheet.
Fair Value Measurements
Fairvalueisthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurement
date.Financialassetsandliabilitiescarriedatfairvalueareclassifiedanddisclosedinoneofthefollowingthreecategories:
·Level1:Quotedpricesforidenticalinstrumentsinactivemarkets.
·Level2:Quotedpricesforsimilarinstrumentsinactivemarkets;quotedpricesforidenticalorsimilarinstrumentsinmarketsthatarenotactive;andmodel-
derivedvaluationswhoseinputsorsignificantvaluedriversareobservable.
·Level3:Unobservableinputsusedwhenlittleornomarketdataisavailable.
64