Jack In The Box 2006 Annual Report Download - page 41

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Discussion of Critical Accounting Policies
We have identified the following as the Company’ s most critical accounting policies, which are those that are
most important to the portrayal of the Company’ s financial condition and results and require management’ s most
subjective and complex judgments. Information regarding the Company’ s other significant accounting policies are
disclosed in Note 1 to our consolidated financial statements.
Share-based Compensation — The Company accounts for share-based compensation in accordance with SFAS
123R. Under the provisions of SFAS 123R, share-based compensation cost is estimated at the grant date based on
the award’ s fair-value as calculated by an option pricing model and is recognized as expense ratably over the
requisite service period. The option pricing models require various highly judgmental assumptions including
volatility, forfeiture rates, and expected option life. If any of the assumptions used in the model change significantly,
share-based compensation expense may differ materially in the future from that recorded in the current period.
Retirement Benefits — The Company sponsors pension and other retirement plans in various forms covering
those employees who meet certain eligibility requirements. Several statistical and other factors which attempt to
anticipate future events are used in calculating the expense and liability related to the plans, including assumptions
about the discount rate, expected return on plan assets and the rate of increase in compensation levels, as determined
by the Company using specified guidelines. In addition, our outside actuarial consultants also use certain statistical
factors such as turnover, retirement and mortality rates to estimate the Company’ s future benefit obligations. The
actuarial assumptions used may differ materially from actual results due to changing market and economic
conditions, higher or lower turnover and retirement rates or longer or shorter life spans of participants. These
differences may impact the amount of pension expense recorded by the Company.
Self Insurance — The Company is self-insured for a portion of its current and prior years’ losses related to its
workers’ compensation, general liability, automotive, medical, and dental programs. In estimating the Company’ s
self insurance accruals, we utilize independent actuarial estimates of expected losses, which are based on statistical
analyses of historical data. These assumptions are closely monitored and adjusted when warranted by changing
circumstances. Should a greater amount of claims occur compared to what was estimated or medical costs increase
beyond what was expected, accruals might not be sufficient, and additional expense may be recorded.
Long-lived Assets — Property, equipment and certain other assets, including amortized intangible assets, are
reviewed for impairment when indicators of impairment are present. This review includes a restaurant-level analysis
that takes into consideration a restaurant’ s operating cash flows, the period of time since a restaurant has been
opened or remodeled, and the maturity of the related market. When indicators of impairment are present, we
perform an impairment analysis on a restaurant-by-restaurant basis. If the sum of undiscounted future cash flows is
less than the net carrying value of the asset, we recognize an impairment loss by the amount which the carrying
value exceeds the fair value of the asset. Our estimates of future cash flows may differ from actual cash flows due
to, among other things, economic conditions or changes in operating performance. In fiscal 2006, we recorded
impairment charges of $4.1 million related to certain restaurant closures and to write-down assets associated with
restaurants which we continue to operate. During 2006, we noted no other indicators of impairment of our long-lived
assets.
Goodwill and Other Intangibles — We also evaluate goodwill and intangible assets not subject to amortization
annually or more frequently if indicators of impairment are present. If the determined fair values of these assets are
less than the related carrying amounts, an impairment loss is recognized. The methods we use to estimate fair value
include future cash flow assumptions, which may differ from actual cash flows due to, among other things,
economic conditions or changes in operating performance. During the fourth quarter, we reviewed the carrying
value of our goodwill and indefinite life intangible assets and determined that no impairment existed as of October
1, 2006.
Allowances for Doubtful Accounts — Our trade receivables consist primarily of amounts due from franchisees
for rents on subleased sites, royalties and distribution sales. We continually monitor amounts due from franchisees
and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our franchisees
to make required payments. This estimate is based on our assessment of the collectibility of specific franchisee
accounts, as well as a general allowance based on historical trends, the financial condition of our franchisees,