Papa Johns 2009 Annual Report Download - page 78

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71
2. Significant Accounting Policies (continued)
At December 27, 2009, we had a net investment of approximately $21.8 million associated with our
United Kingdom subsidiary (PJUK). During 2008, we recorded a goodwill impairment charge of $2.3
million associated with our PJUK operations (none in 2009 or 2007). We updated our evaluation of the
fair value of our PJUK subsidiary in 2009. Our analysis indicated the fair value exceeded the carrying
value by approximately 10%. The goodwill allocated to this entity approximated $15.2 million at
December 27, 2009. 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.
We updated our evaluation of the fair value of our investment in our domestic company-owned
restaurants during 2009. We test for goodwill impairment at the region level, which is one step below the
reporting segment level. Based on our evaluation, our West Region which has goodwill of approximately
$20.8 million at December 27, 2009 could be subject to future impairment if operations deteriorate from
their present levels. The estimated fair value of our West Region exceeded the carrying value by
approximately 10%.
If our initiatives with PJUK and certain domestic markets are not successful, future impairment charges
could occur. See Note 6 for additional information.
Restaurant Closures
We recognize the costs associated with restaurant closures at the time such costs are actually incurred,
generally expected to be at the time the closing occurs.
Deferred Costs
We defer certain systems development and related costs that meet established criteria. Amounts deferred,
which are included in property and equipment, are amortized principally over periods not exceeding five
years beginning in the month subsequent to completion of the related systems project. Total costs
deferred were approximately $800,000 in 2009, $750,000 in 2008 and $600,000 in 2007.
Deferred Income Tax Assets and Tax Reserves
Papa John’s is subject to income taxes in the United States and several foreign jurisdictions. Significant
judgment is required in determining Papa John’s provision for income taxes and the related assets and
liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable
and those deferred. Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities, and are measured using enacted tax rates and
laws that are expected to be in effect when the differences reverse. Deferred tax assets are also
recognized for the estimated future effects of tax loss carryforwards. The effect on deferred taxes of
changes in tax rates is recognized in the period in which the enactment date changes. As a result, our
effective tax rate may fluctuate. Valuation allowances are established when necessary on a jurisdictional
basis to reduce deferred tax assets to the amounts we expect to realize.