Jack In The Box 2015 Annual Report Download - page 37

Restaurant Closing Costs — Restaurant closing costs consist of future lease commitments, net of anticipated sublease rentals and expected ancillary
costs. We record a liability for the net present value of any remaining lease obligations, net of estimated sublease income, at the date we cease using a
property. Subsequent adjustments to the liability as a result of changes in estimates of sublease income or lease cancellations are recorded in the period
incurred. The estimates we make related to sublease income are subject to a high degree of judgment and may differ from actual sublease income due to
changes in economic conditions, desirability of the sites and other factors. During fiscal year 2015, we recorded charges of $2.7 million related to revised
sublease assumptions and adjustments for lease terminations.
Share-based Compensation — We offer share-based compensation plans to attract, retain and incentivize key officers, non-employee directors and
employees to work toward the financial success of the Company. Share-based compensation cost for our stock option grants 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 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.
Goodwill and Other Intangibles — We evaluate goodwill and non-amortizing intangible assets annually, or more frequently if indicators of impairment
are present. Our impairment analyses first include a qualitative assessment to determine whether events or circumstances indicate the carrying amount may
not be recoverable. If this assessment results in a less-than 50% likelihood that impairment exists, then further analysis is not required. If the results of these
analyses indicate otherwise, then we compare the fair value of the reporting unit for goodwill and the fair value of the intangible asset to their respective
carrying values. If the determined fair values of the respective 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. We performed our annual assessment of impairment over all of our goodwill and other intangibles assets
during the fourth quarter of 2015, and qualitatively determined that no impairment existed as of September 27, 2015. As of the impairment testing date, the
fair value of our reporting units significantly exceeded their carrying values.
Legal Accruals — The Company is subject to claims and lawsuits in the ordinary course of its business. A determination of the amount accrued, if any, for
these contingencies is made after analysis of each matter. We continually evaluate such accruals and may increase or decrease accrued amounts as we deem
appropriate. Because lawsuits are inherently unpredictable, and unfavorable resolutions could occur, assessing contingencies is highly subjective and
requires judgment about future events. As a result, the amount of ultimate loss may differ from those estimates.
Income Taxes — We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and
amortization expense allowable for tax purposes, allowable tax credits, effective rates for state and local income taxes, and the tax deductibility of certain
other items. We adjust our effective income tax rate as additional information on outcomes or events becomes available. Our estimates are based on the best
available information at the time that we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal
year-end. Income tax returns are subject to audit by federal, state and local governments, generally years after the returns are filed. These returns could be
subject to material adjustments or differing interpretations of the tax laws.
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See Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the notes to the consolidated financial statements for a discussion
of the impact of new accounting pronouncements on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to risks relating to financial instruments is changes in interest rates. Our credit facility is comprised of a revolving credit facility and
a term loan, bearing interest at an annual rate equal to the prime rate or LIBOR plus an applicable margin based on a financial leverage ratio. As of
September 27, 2015, the applicable margin for the LIBOR-based revolving loans and term loan was set at 1.75%.
We use interest rate swap agreements to reduce exposure to interest rate fluctuations. In April 2014, we entered into nine forward-starting interest rate swap
agreements that effectively convert $300.0 million of our variable rate borrowings to a fixed rate basis from October 2014 through October 2018. In June
2015, we entered into eleven forward-starting interest rate swap agreements that effectively convert an additional $200.0 million of our variable rate
borrowings to a fixed rate from October 2015 through October 2018, and $500.0 million from October 2018 through October 2022. Based on the applicable
margin in effect as of September 27, 2015, these twenty interest rate swaps would yield average fixed rates of 2.60%, 2.93%, 3.65%, 4.16%, 4.37%,
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