Papa Johns 2006 Annual Report Download - page 65

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2. Significant Accounting Policies (continued)
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. Our United Kingdom subsidiary, PJUK,
has reported deteriorating operating results for the past three years primarily due to lower sales by Perfect
Pizza restaurants, which were sold in March 2006, and a decrease in net franchise units due to restaurant
closings. Based on our analysis of PJUK’s estimated fair value during the fourth quarter of 2005, we
concluded that an impairment charge of $1.1 million was necessary, which is included in other general
expenses in the accompanying consolidated statements of income (no goodwill impairment charge was
incurred in 2006 or 2004).
At December 31, 2006, we had a net investment of approximately $24.1 million associated with PJUK,
of which approximately $17.2 million was composed of goodwill. In addition to the sale of Perfect Pizza
operations, as discussed below in the “Discontinued Operations” section, we have restructured
management and developed plans for PJUK to improve its future operating results. The plans include
efforts to increase Papa John’s brand awareness in the United Kingdom and increase net PJUK
franchised unit openings over the next several years. We will continue to periodically evaluate our
progress in achieving these plans. If our initiatives are not successful, additional impairment charges
could occur. See Note 7 for additional information concerning our carrying value for goodwill.
Restaurant Closures
We recognize the costs associated with restaurant closures at the time such costs are actually incurred, as
required by SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, generally
expected to be at the time the closing occurs. There were no significant restaurant closure charges
recorded in 2006, 2005 and 2004.
Discontinued Operations
The Company sold its Perfect Pizza operations, consisting of the franchised units and related distribution
operations in March 2006, which were classified as discontinued (see Note 4). A business component
that either has been disposed of or is classified as held for sale is accounted for as a discontinued
operation if the cash flow of the component has been or will be eliminated from the ongoing operations
of the Company and the Company will no longer have any significant continuing involvement in the
business. The results of operations of the discontinued operations through the date of sale, including any
gain or loss on disposition, are aggregated and presented on a separate line in the income statement. Prior
to dispositions, the assets and liabilities of discontinued operations are aggregated and reported on
separate lines in the balance sheet. We have separately disclosed the operating and investing activities of
the cash flows attributable to our discontinued Perfect Pizza operations. There was not an impact on our
financing activities associated with the discontinued operations for the three years presented in the
statements of cash flows.
Deferred Costs
We defer certain systems development and related costs that meet established criteria. Amounts deferred,
which are included in property and equipment, are amortized principally over periods not exceeding five
years beginning in the month subsequent to completion of the related systems project. Total costs
deferred were approximately $415,000 in 2006, $566,000 in 2005 and $489,000 in 2004.