Papa Johns 2004 Annual Report Download - page 47

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2. Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over
the estimated useful lives of the assets (generally five to ten years for restaurant, commissary and other
equipment, and 20 to 40 years for buildings and improvements). Leasehold improvements are amortized
over the terms of the respective leases, including the first renewal period (generally five to ten years).
Depreciation expense was $29.1 million in 2004, $30.3 million in 2003 and $31.4 million in 2002.
Leases and Leasehold Improvements
We account for leases in accordance with Statement of Financial Accounting Standards (SFAS) No. 13,
Accounting for Leases, and other related guidance. SFAS No. 13 requires lease expense to be recognized
on a straight-line basis over the expected life of the lease term. A lease term often includes option
periods, available at the inception of the lease, when failure to renew the lease would impose a penalty to
us. Such penalty may include the recognition of impairment on our leasehold improvements should we
choose not to continue the use of the leased property.
During the fourth quarter of 2004, we completed a comprehensive review of our accounting for leases
and leasehold improvements, including the recognition of incentive payments received from landlords.
We determined leasehold improvements were in some cases amortized over a longer period than the
remaining underlying lease term, and that straight-line lease expense was in some cases calculated over
an insufficient expected remaining lease term. As a result, we recorded a cumulative adjustment of $1.9
million, of which $1.5 million was recorded as an increase to rent expense in general and administrative
expenses and $400,000 was recorded as an increase to depreciation expense in depreciation and
amortization in the accompanying consolidated statements of income. Approximately $1.6 million of the
adjustment was related to years prior to 2004 and was not considered material to any of the prior period
financial statements to warrant a restatement of those financial statements. We do not expect this
accounting adjustment to have a significant impact on future operating earnings.
Long-Lived and Intangible Assets
The recoverability of long-lived assets is evaluated annually or more frequently if impairment indicators
exist. Indicators of impairment include historical financial performance, operating trends and our future
operating plans. If impairment indicators exist, we evaluate the recoverability of long-lived assets on an
operating unit basis (e.g., an individual restaurant) based on undiscounted expected future cash flows
before interest for the expected remaining useful life of the operating unit. Recorded values for long-
lived assets that are not expected to be recovered through undiscounted future cash flows are written
down to current fair value, which is generally determined from estimated discounted future net cash
flows for assets held for use or net realizable value for assets held for sale (see Note 7).
The recoverability of intangible assets (i.e., goodwill) is evaluated annually, or more frequently if
impairment indicators exist, on a reporting unit basis by comparing the fair value derived from
discounted cash flows of the reporting unit to its carrying value. No goodwill impairment was recorded in
2004, 2003 or 2002.