Papa Johns 2004 Annual Report Download - page 52

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2. Significant Accounting Policies (continued)
Accounting Changes
SFAS No. 150
We adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, (SFAS No. 150) in fiscal 2003. SFAS No. 150 requires parent companies to
record minority interest liabilities at estimated settlement value if the majority-owned subsidiary has
equity instruments that are redeemable at a fixed date and such redemption is certain to occur. We have a
majority interest in one subsidiary, which owns and operates 36 Papa John’s restaurants, that meets these
provisions. During 2003, we recorded an after-tax cumulative effect adjustment of $413,000 ($660,000
pre-tax) or $0.02 per share, in our consolidated statements of income, related to the adoption of SFAS
No. 150.
During 2004, we amended the operating agreement with the minority interest holder of the 36-restaurant
subsidiary. The amended operating agreement eliminates a mandatory purchase requirement and related
liability, and therefore the provisions of SFAS No. 150 are no longer applicable. Due to the amendment
to the operating agreement, Papa John’s recorded a reduction in the minority interest liability and a
reduction in interest expense of $625,000 during 2004 to adjust the minority interest liability to book
value from the previously recorded fair value.
Prior Year Data
Certain prior year data has been reclassified to conform to the 2004 presentation.
3. Formation of Joint Venture
During 2004, Papa John’s entered into a joint venture arrangement with a third party. Under the terms of
the arrangement, Papa John’s effectively sold 49% of 71 Company-owned restaurants located in Texas
to the third party for $3.0 million ($2.5 million in cash and $500,000 as a note payable to Papa John’s).
We recognized a gain of $280,000 from the sale of our 49% interest in the 71 restaurants. We retained a
51% ownership interest and are required to consolidate the joint venture and its financial results with
those of Papa John’s.
4. 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.