Papa Johns 2006 Annual Report Download - page 66

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2. Significant Accounting Policies (continued)
We also defer the incremental direct costs associated with selling development agreements to domestic
and international franchisees. These deferred costs, included in other assets in the accompanying
consolidated balance sheets, are amortized in proportion to revenue recognized. Total costs deferred, net
of amortization, were approximately $74,000 in 2006, $145,000 in 2005 and $1.0 million in 2004.
Deferred Income Tax Assets and Tax Reserves
We provide reserves for potential exposures when we consider it probable that a taxing authority may
take a sustainable position on a matter contrary to our filed position. We evaluate these issues on a
quarterly basis to adjust for events, such as court rulings or examination settlements that may impact our
ultimate payment for such exposures.
We recorded net deferred income tax assets of $8.0 million and $9.0 million in 2006 and 2005,
respectively, of which approximately $7.2 million in 2005 related to BIBP’s net operating loss
carryforward (none in 2006, see Note 15).
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 subsidiaries, located in the United Kingdom,
Mexico and China. 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 a 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 was applied to all stock options issued after the effective date.