Papa Johns 2007 Annual Report Download - page 74

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2. Significant Accounting Policies (continued)
Leases and Leasehold Improvements
We account for leases in accordance with Statement of Financial Accounting Standards (“SFAS”) No.
13, Accounting for Leases, and other related guidance. SFAS No. 13 requires lease expense to be
recognized on a straight-line basis over the expected life of the lease term. A lease term often includes
option periods, available at the inception of the lease, when failure to renew the lease would impose a
penalty to us. Such penalty may include the recognition of impairment on our leasehold improvements
should we choose not to continue the use of the leased property.
Long-Lived and Intangible Assets
The recoverability of long-lived assets is evaluated annually or more frequently if impairment indicators
exist. Indicators of impairment include historical financial performance, operating trends and our future
operating plans. If impairment indicators exist, we evaluate the recoverability of long-lived assets on an
operating unit basis (e.g., an individual restaurant) based on undiscounted expected future cash flows
before interest for the expected remaining useful life of the operating unit. Recorded values for long-
lived assets that are not expected to be recovered through undiscounted future cash flows are written
down to current fair value, which is generally determined from estimated discounted future net cash
flows for assets held for use or estimated net realizable value for assets held for sale (see Note 8).
The recoverability of indefinite-lived 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. We purchased 118 domestic
restaurants during 2007 and 2006 in several markets. If our plans for increased sales, unit growth and
profitability are not met, future impairment charges could occur. Our United Kingdom subsidiary, PJUK,
has reported operating losses for the past three years primarily due to lower sales by Perfect Pizza
restaurants, which were sold in March 2006, and a local corporate infrastructure to support our plans to
open additional Company-owned and franchise restaurants over the next several years. 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 recorded in 2007
or 2006).
At December 30, 2007, we had a net investment of approximately $17.3 million associated with PJUK,
excluding the $4.8 million loan due from the purchaser of Perfect Pizza. The estimated fair value of
PJUK at the end of 2007 is in excess of our net investment. In addition to the sale of the 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, improve sales and profitability
for individual restaurants, 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.