Papa Johns 2010 Annual Report Download - page 75

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2. Significant Accounting Policies (continued)
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.
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 $2.0 million in 2010, $800,000 in 2009 and $750,000 in 2008.
The unamortized systems development costs approximated $3.6 million and $2.8 million as of December
26, 2010 and December 27, 2009, respectively.
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
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.
As of December 26, 2010, we had a net deferred income tax asset balance of $9.3 million. We have not
provided a valuation allowance for the deferred income tax assets associated with our domestic
operations since we believe it is more likely than not that future earnings will be sufficient to ensure the
realization of the net deferred income tax assets for federal and state purposes.
Certain tax authorities periodically audit the Company. We provide reserves for potential exposures. 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 $550,000,
$1.2 million and $1.7 million in our customary income tax expense associated with the finalization of
certain income tax issues in 2010, 2009 and 2008, respectively. See Note 13 for additional information.