Jack In The Box 2006 Annual Report Download - page 59

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
F-9
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Leases — We review all leases for capital or operating classification at their inception under the guidance of
Statement of Financial Accounting Standard (“SFAS 13”), Accounting for Leases. Our operations are primarily
conducted under operating leases. Within the provisions of certain of our leases, there are rent holidays and
escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and
escalations have been reflected in rent expense on a straight-line basis over the expected lease term. Differences
between amounts paid and amounts expensed are recorded as deferred rent. The lease term commences on the
date when we have the right to control the use of the leased property. Certain of our leases also include
contingent rent provisions based on sales levels, which is accrued at the point in time we determine that it is
probable such sales levels will be achieved.
Impairment of 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. Long-lived assets that are held for
disposal are reported at the lower of their carrying value or fair value, less estimated costs to sell.
In addition, goodwill and intangible assets not subject to amortization are evaluated for impairment 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. We performed our annual impairment tests of
goodwill and non-amortized intangible assets in the fourth quarter of fiscal years 2006 and 2005, and determined
these assets were not impaired at October 1, 2006 and October 2, 2005.
Revenue recognition — Revenue from restaurant and fuel and convenience store sales are recognized when the
food, beverage, and fuel products are sold.
We provide purchasing, warehouse and distribution services for most of our franchise-operated restaurants.
Revenue from these services is recognized at the time of physical delivery of the inventory.
Franchise arrangements generally provide for initial franchise fees and continuing royalty payments to us based
on a percentage of sales. Among other things, a franchisee may be provided the use of land and building,
generally for a period of 20 years, and is required to pay negotiated rent, property taxes, insurance and
maintenance. Franchise fees are recorded as revenue when we have substantially performed all of our contractual
obligations. Expenses associated with the issuance of the franchise are expensed as incurred. Franchise royalties
are recorded in revenues on an accrual basis. Certain franchise rents, which are contingent upon sales levels, are
recognized in the period in which the contingency is met. Gains on the sale of restaurant businesses to
franchisees are recorded when the sales are consummated and certain other gain recognition criteria are met.
These gains are included in gains on sale of company-operated restaurants and other in the consolidated
statements of earnings and were $42,046, $23,334 and $17,918 in fiscal years 2006, 2005 and 2004, respectively.
Preopening costs associated with the opening of a new restaurant consist primarily of employee training costs
and are expensed as incurred.
Restaurant closure costs — All costs associated with exit or disposal activities are recognized when they are
incurred. Restaurant closure costs, which are included in selling, general and administrative expenses, consist of
future lease commitments, net of anticipated sublease rentals, and expected ancillary costs.
Self-insurance — We are self-insured for a portion of our workers’ compensation, general liability, automotive,
and employee medical and dental claims. We utilize a paid loss plan for our workers’ compensation, general
liability and automotive programs, which have predetermined loss limits per occurrence and in the aggregate.
We establish our insurance liability and reserves using independent actuarial estimates of expected losses for
determining reported claims and as the basis for estimating claims incurred but not reported.