Papa Johns 2008 Annual Report Download - page 77

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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 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.
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 estimated fair value
to its carrying value. Our estimated fair value for Company-owned restaurants is comprised of two
components. The first component is the cash sales price that would be received at the time of the sale and
the second component is an investment in the continuing franchise agreement, representing the
discounted value of future royalties less any incremental direct operating costs, that would be collected
under the ten-year franchise agreement.
During 2008, we sold to domestic franchisees 62 Company-owned restaurants located primarily in three
markets. As a part of the sales of these restaurants, we recorded a $3.6 million intangible asset for the
investment in the continuing franchise agreement, representing the discounted value of the royalties we
will receive over the next ten years from the purchaser/franchisee. The $3.6 million intangible asset will
be amortized over the ten-year franchise agreement as a reduction in the royalty income of $360,000
annually. If our plans for increased sales, unit growth and profitability are not met, future impairment
charges could occur.
At December 28, 2008, we had a net investment of approximately $15.7 million associated with our
United Kingdom subsidiary (PJUK), excluding the $3.5 million loan due from the purchaser of Perfect
Pizza. During 2008, we recorded an impairment charge of $2.3 million associated with our PJUK
operations. We have developed plans for PJUK to continue to improve its 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 with PJUK and certain domestic markets are not successful, future impairment charges
could occur. See Note 7 for additional information.