Papa Johns 2010 Annual Report Download - page 37

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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 estimated 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 a total of 62 Company-owned restaurants located primarily
in three markets. As 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 intangible asset is being
amortized over the ten-year franchise agreement as a reduction in royalty income of $360,000 annually.
The intangible asset is recorded in other assets in the accompanying consolidated balance sheet at
December 26, 2010 with a remaining value of approximately $2.8 million.
At December 26, 2010, we had a net investment of approximately $20.4 million associated with PJUK.
During 2008, we recorded a goodwill impairment charge of $2.3 million associated with our PJUK
operations (none in 2010 or 2009). We updated our evaluation of the fair value of our PJUK subsidiary in
2010. Our analysis indicated the fair value exceeded the carrying value by approximately 10%. The
goodwill allocated to this entity approximated $14.7 million at December 26, 2010. We have plans for
PJUK to continue to improve its operating results, including 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 are currently on target to achieve
these plans.
We updated our evaluation of the fair value of our investment in our domestic Company-owned
restaurants during 2010. We test for goodwill impairment at the region level, which is one step below the
reporting segment level. The fair value of each reporting unit was substantially in excess of its carrying
value as of the annual test date.
Insurance Reserves
Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles
and health insurance coverage provided to our employees are self-insured up to certain individual and
aggregate reinsurance levels. Losses are accrued based upon undiscounted estimates of the aggregate
retained liability for claims incurred using certain third-party actuarial projections and our claims loss
experience. The estimated insurance claims losses could be significantly affected should the frequency or
ultimate cost of claims significantly differ from historical trends used to estimate the insurance reserves
recorded by the Company.
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Deferred Income Tax Accounts 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