Papa Johns 2007 Annual Report Download - page 77

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70
2. Significant Accounting Policies (continued)
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is a revision of
SFAS No. 123. As required, we adopted the provisions of SFAS No. 123(R) effective at the beginning of
our fiscal 2006, using the modified-prospective method. Under the modified-prospective method,
compensation cost recognized in 2006 and 2007 includes (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of December 25, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all
share-based payments granted subsequent to December 25, 2005, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been
restated. Upon adoption of SFAS No. 123(R), we elected to continue using the Black-Scholes option-
pricing model. If we had adopted SFAS No. 123(R) in prior years, the impact on our 2005 operating
income of that standard would have been minimal. SFAS No. 123(R) requires the benefit of tax
deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather
than as an operating cash flow in the accompanying consolidated statements of cash flows. The $3.3
million and $6.5 million excess tax benefit in 2007 and 2006, respectively, classified as a financing cash
inflow, would have been classified as an operating cash inflow if the Company had not adopted SFAS
No. 123(R). Operating income and cash flow operating results for 2005 have not been restated for the
adoption of SFAS No. 123(R).
The effect on income and earnings per share as if the fair value based method had been applied to all
outstanding and unvested awards in 2005 was not significant since the Company adopted SFAS No. 123
in 2002.
Derivative Financial Instruments
We recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. At inception and on an on-going basis, we assess whether each
derivative that qualifies for hedge accounting continues to be highly effective in offsetting changes in
the cash flows of the hedged item. If the derivative meets the hedge criteria as defined by certain
accounting standards, depending on the nature of the hedge, changes in the fair value of the derivative
are either offset against the change in fair value of assets, liabilities or firm commitments through
earnings or recognized in accumulated other comprehensive income (loss) until the hedged item is
recognized in earnings. The ineffective portion of a derivative’s change in fair value, if any, is
immediately recognized in earnings.
We recognized $2.0 million ($1.3 million after tax) in 2007, $572,000 ($360,000 after tax) in 2006 and
$974,000 ($598,000 after tax) in 2005 in accumulated other comprehensive income (loss) for the net
change in fair value of our derivatives associated with our debt agreements. The ineffective portion of
our hedge was not material to our operating earnings for 2007, 2006 and 2005. Fair value is based on
quoted market prices. See Note 9 for additional information on our debt and credit arrangements.