Papa Johns 2008 Annual Report Download - page 79

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72
2. Significant Accounting Policies (continued)
The Company adopted the provisions of the Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (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, the Company 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. As of the adoption date, we had tax-affected unrecognized benefits of
approximately $7.4 million. To the extent these unrecognized tax benefits are ultimately recognized, the
effective tax rate will be impacted in a future period. The Company recognizes interest and penalties, if
any, related to unrecognized tax benefits in income tax expense.
Certain tax authorities periodically audit the Company. We provide reserves for potential exposures
based on FIN 48 requirements described above. 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 $1.7 million, $3.4 million and $2.5 million in our customary
income tax expense associated with the finalization of certain income tax issues in 2008, 2007 and 2006,
respectively.
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 and losses 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).