Papa Johns 2012 Annual Report Download - page 33

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appropriate rates. The selected discount rates considered the risk and nature of our PJUK reporting unit’s
cash flow and the rates of return market participants would require to invest their capital in the PJUK
reporting unit. Additionally, we made various estimates and assumptions in determining the fair value,
including growth rates.
The fair value of PJUK exceeded the carrying value by 37%. We believe our PJUK reporting unit will
continue to improve its operating results through ongoing growth initiatives, by increasing Papa John’s
brand awareness in the United Kingdom, improving sales and profitability for individual franchised
restaurants and increasing PJUK franchised net unit openings over the next several years. If adverse
economic events occur in the United Kingdom, there is risk of future impairment charges.
Subsequent to completing our annual qualitative and quantitative goodwill impairment tests, no
indications of impairment were identified.
Insurance Reserves
Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles,
property, and health insurance coverage provided to our employees are funded by the Company up to
certain retention 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 differ significantly from historical trends used to estimate the insurance reserves recorded
by the Company.
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 new tax rate is enacted. 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 30,
2012, we had a net deferred income tax liability of approximately $400,000.
Tax authorities periodically audit the Company. We record reserves and related interest and penalties for
identified exposures as income tax expense. We evaluate these issues and adjust for events, such as
statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate
payment for such exposures. We recognized reductions of $738,000, $1.9 million and $550,000 in our
income tax expense associated with the finalization of certain income tax issues in 2012, 2011 and 2010,
respectively (see “Note 15” of “Notes to Consolidated Financial Statements”).
Restatement of Previously Issued Financial Statements
In connection with the evaluation of the accounting for newly formed joint ventures in 2012, we reviewed
our accounting for our previously existing joint venture arrangements. As a result of our review, we
determined an error occurred in the accounting for one joint venture agreement, which contained a
mandatorily redeemable feature added through a contract amendment in the third quarter of 2009. This