Jack In The Box 2006 Annual Report Download - page 58

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
F-8
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts and notes receivable, net is primarily comprised of receivables from franchisees and tenants.
Franchisee receivables include rents, royalties, and marketing fees associated with the franchise agreements and
receivables arising from distribution services provided to most franchisees. Tenant receivables relate to
subleased properties where the Company is on the master lease agreement. The allowance for doubtful accounts
is based on historical experience and a review of existing receivables. Changes in accounts receivable are
classified as an operating activity in the consolidated statements of cash flows.
Inventories are valued at the lower of cost or market on a first-in, first-out basis. Changes in inventories are
classified as an operating activity in the consolidated statements of cash flows.
Assets held for sale and leaseback typically represent the costs for new sites that we plan to sell and lease back
when construction is completed. Gains or losses realized on sale-leaseback transactions are deferred and
amortized to income over the lease terms. During 2005, we exercised our purchase option under certain lease
arrangements. In fiscal year 2006, we sold and leased back these properties at more favorable rental rates
resulting in a decrease in assets held for sale and leaseback at October 1, 2006 compared with October 2, 2005.
Property and equipment, at cost — Expenditures for new facilities and equipment, and those that substantially
increase the useful lives of the property, are capitalized. Facilities leased under capital leases are stated at the
present value of minimum lease payments at the beginning of the lease term, not to exceed fair value.
Maintenance and repairs are expensed as incurred. When properties are retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts, and gains or losses on the dispositions
are reflected in results of operations.
Buildings, equipment, and leasehold improvements are generally depreciated using the straight-line method
based on the estimated useful lives of the assets, over the initial lease term for certain assets acquired in
conjunction with the lease commencement for leased properties, or the remaining lease term for certain assets
acquired after the commencement of the lease for leased properties. Building and leasehold improvement assets
are assigned lives that range from 3 to 35 years; and equipment assets are assigned lives that range from 2 to 35
years. In certain situations, one or more option periods may be used in determining the depreciable life of assets
related to leased properties if we deem that an economic penalty would be incurred otherwise. In either
circumstance, the Company’ s policy requires lease term consistency when calculating the depreciation period, in
classifying the lease and in computing straight-line rent expense.
Effective October 1, 2006, we adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB
Statement No. 143 (“FIN 47”), which clarifies the term conditional asset retirement obligation and requires a
liability to be recorded if the fair value of the obligation can be reasonably estimated. The impact from the
adoption of this statement is discussed in Note 2, Asset Retirement Obligations.
Other assets primarily include lease acquisition costs, acquired franchise contract costs, deferred finance costs
and COLI policies. Lease acquisition costs primarily represent the fair values of acquired lease contracts having
contractual rents lower than fair market rents, and are amortized on a straight-line basis over the remaining initial
lease term, generally 18 years. Acquired franchise contract costs, which represent the acquired value of franchise
contracts, are amortized over the term of the franchise agreements, generally 10 years, based on the projected
royalty revenue stream. Deferred finance costs are amortized using the effective-interest method over the terms
of the respective loan agreements, from 4 to 7 years.
Company-owned life insurance — We have purchased company-owned life insurance policies. As of October 1,
2006 and October 2, 2005, the cash surrender values of these policies were $54,350 and $43,741 respectively. A
portion of these policies resides in an umbrella trust for use only to pay plan benefits to participants in the
Company’ s non-qualified pension and defined contribution plans, or to pay creditors if the Company becomes
insolvent. The cash surrender values of those policies covered under the trust were $24,420 and $22,927 as of
October 1, 2006 and October 2, 2005, respectively. The trust also includes cash of $811 and $830 as of October
1, 2006 and October 2, 2005, respectively.