Papa Johns 2005 Annual Report Download - page 58

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2. Significant Accounting Policies (continued)
Advertising and Related Costs
Advertising and related costs include the costs of domestic Company-owned restaurant activities such as
mail coupons, door hangers and promotional items and contributions to the Papa John’s Marketing Fund,
Inc. (the “Marketing Fund”) and local market cooperative advertising funds (“Co-op Funds”).
Contributions by domestic Company-owned and franchised restaurants to the Marketing Fund and the
Co-op Funds are based on an established percentage of monthly restaurant revenues. The Marketing Fund
is responsible for developing and conducting marketing and advertising for the Papa John’s system. The
Co-op Funds are responsible for developing and conducting advertising activities in a specific market,
including the placement of electronic and print materials developed by the Marketing Fund. We
recognize domestic Company-owned restaurant contributions to the Marketing Fund and the Co-op
Funds in which we do not have a controlling interest in the period in which the contribution accrues.
Foreign Currency Translation
The local currency is the functional currency for our foreign subsidiary, PJUK. 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) at the beginning of
fiscal 2006. 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 following paragraph. SFAS 123(R) also
requires the benefit of tax deductions related to stock option exercises in excess of recognized
compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as
required currently. 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 the
tax deductions recognized from the exercise of stock options in operating cash flows were $5.6 million in
2005, $2.9 million in 2004 and $540,000 in 2003.