Papa Johns 2003 Annual Report Download - page 51

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2. Significant Accounting Policies (continued)
Prior Year Data
Certain prior year data has been reclassified to conform to the 2003 presentation.
3. Accounting for Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (FIN 46). In December 2003, the FASB modified
FIN 46 to make certain technical corrections and address certain implementation issues that had arisen.
FIN 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining
when a company should include the assets, liabilities, noncontrolling interests and results of activities of
a VIE in its consolidated financial statements.
In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal
structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to
carry out its principal activities without additional subordinated financial support, (2) has a group of
equity owners that are unable to make significant decisions about its activities, or (3) has a group of
equity owners that do not have the obligation to absorb losses or the right to receive returns generated by
its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial
interest in the VIE (“a variable interest holder”) is obligated to absorb a majority of the risk of loss from
the VIEs activities, is entitled to receive a majority of the VIEs residual returns (if no party absorbs a
majority of the VIEs losses), or both. A variable interest holder that consolidates the VIE is called the
primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the
VIEs assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as
if it were consolidated based on majority voting interest. FIN 46 also requires disclosures about VIEs that
the variable interest holder is not required to consolidate but in which it has a significant variable
interest.
We are required to apply the provisions of FIN 46 to VIEs that qualify as special purpose entities
(“SPEs”) at December 28, 2003. We are required to apply the provisions of FIN 46 to all other qualifying
VIEs at the end of the first quarter of 2004.
We have a purchasing arrangement with BIBP Commodities, Inc. (“BIBP”), an SPE formed at the
direction of our Franchise Advisory Council in 1999, for the sole purpose of reducing cheese price
volatility to domestic system-wide restaurants. BIBP is an independent franchisee-owned corporation.
BIBP purchases cheese at the market price and sells it to our distribution subsidiary, PJ Food Service,
Inc. (“PJFS”), at a fixed quarterly price based in part upon historical average market prices. PJFS in turn
sells cheese to Papa John’s restaurants (both Company-owned and franchised) at a set quarterly price.
PJFS purchased $126.7 million, $147.7 million and $154.1 million of cheese from BIBP during 2003,
2002 and 2001, respectively.
We are the primary beneficiary of BIBP, a VIE, and have consolidated the balance sheet of BIBP as of
December 28, 2003. A cumulative effect adjustment was not required upon initial consolidation because
BIBP had a surplus in stockholders’ equity at the December 28, 2003 adoption date, and such surplus is
reflected as a minority interest liability in the consolidated balance sheet.