Papa Johns 2007 Annual Report Download - page 37

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30
established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we
expect to realize.
We have not provided a valuation allowance for the deferred income tax assets associated with our
domestic operations since we believe it is more likely than not that future earnings will be sufficient to
ensure the realization of the net deferred income tax assets for federal and state purposes.
Certain tax authorities periodically audit the Company. We provide reserves for potential exposures
based on Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48) requirements. We evaluate these issues on a quarterly basis to
adjust for events, such as court rulings or audit settlements, which may impact our ultimate payment for
such exposures. We recognized reductions of $3.4 million and $2.5 million in our customary income tax
expense associated with the finalization of certain income tax issues in 2007 and 2006, respectively (see
“Note 15” of “Notes to Consolidated Financial Statements”).
Consolidation of BIBP Commodities, Inc. (“BIBP”) as a Variable Interest Entity
BIBP is a franchisee-owned corporation that conducts a cheese-purchasing program on behalf of
domestic Company-owned and franchised restaurants. As required by the FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51
(FIN 46), we consolidate the financial results of BIBP, since we are deemed to be the primary
beneficiary, as defined by FIN 46, of BIBP. We recognized pre-tax losses of approximately $31.7 million
during 2007 and pre-tax income of $19.0 million during 2006 and $4.5 million during 2005 from the
consolidation of BIBP. We expect the consolidation of BIBP to continue to have a significant impact on
Papa John’s operating income in future periods due to the volatility of cheese prices, but BIBP’s
operating results are not expected to be cumulatively significant over time. Papa John’s will recognize
the operating losses generated by BIBP if the shareholders’ equity of BIBP is in a net deficit position.
Further, Papa John’s will recognize subsequent operating income generated by BIBP up to the amount of
BIBP losses previously recognized by Papa John’s.
New Accounting Standards
We adopted the provisions of FIN 48 on January 1, 2007. FIN 48 addresses the accounting for income
taxes by prescribing the minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. In addition, FIN 48 expands the disclosure requirements
concerning unrecognized tax benefits as well as any significant changes that may occur in the next twelve
months associated with such unrecognized tax benefits. As a result of the implementation of FIN 48, we
recognized an approximate $614,000 decrease in the liability for unrecognized tax benefits, which is
accounted for as an increase to the January 1, 2007 balance of retained earnings. See Note 15 for
additional information.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 requires
companies to determine fair value based on the price that would be received to sell the asset or paid to
transfer the liability to a market participant. SFAS No. 157 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. We will adopt the provisions of SFAS No. 157 in two
phases: (1) phase one is effective for financial assets and liabilities in the fiscal year beginning after
November 15, 2007 or our first quarter of 2008 and (2) phase two is effective for non-financial assets and
liabilities beginning after November 15, 2008 or our first quarter of 2009. The adoption of SFAS No. 157
for financial assets and liabilities in 2008 is not expected to have any impact on our results of operations
and financial condition. The adoption for non-financial assets and liabilities in fiscal 2009 could impact
our future estimates of valuing long-lived and intangible assets such as our annual fair value evaluation
of PJUK and domestic Company-owned restaurants.