Papa Johns 2004 Annual Report Download - page 49

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48
2. Significant Accounting Policies (continued)
Foreign Currency Translation
The local currency is the functional currency for our foreign subsidiary, Papa John’s UK. Earnings are
translated into U.S. dollars using monthly average exchange rates, while balance sheet accounts are
translated using year-end exchange rates. The resulting translation adjustments are included as a
component of accumulated other comprehensive income (loss).
Stock-Based Compensation
Effective at the beginning of fiscal 2002, we elected to expense the cost of employee stock options in
accordance with the fair value method contained in SFAS No. 123, Accounting and Disclosure of Stock-
Based Compensation. Under SFAS No. 123, the fair value for options is estimated at the date of grant
using the Black-Scholes-Merton (“Black-Scholes”) option pricing model which requires the input of
highly subjective assumptions including the expected stock price volatility. The election was effective as
of the beginning of fiscal 2002 and applies to all stock options issued after the effective date.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R),
Share-Based Payment, which is a revision of FASB Statement No. 123. We expect to continue using the
Black-Scholes option pricing model upon the required adoption of SFAS No. 123(R) on June 27, 2005. If
we had adopted SFAS No. 123 (R) in prior years, the impact of that standard would have approximated
the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per
share in the table, which follows. SFAS No. 123(R) also requires the benefit of tax deductions in excess
of recognized compensation expense to be reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after the adoption. While we cannot estimate what those
amounts will be in the future (because they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows recognized in prior periods related to the full benefit
of tax deductions from stock option exercises was $2.9 million, $540,000 and $1.0 million in 2004, 2003
and 2002, respectively.