Papa Johns 2012 Annual Report Download - page 67

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61
2. Significant Accounting Policies (continued)
Intangible Assets - Goodwill
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2011-08,
“Testing Goodwill for Impairment,” was effective for annual and interim goodwill impairment tests
performed for fiscal years beginning after December 15, 2011; however, early adoption was permitted.
We elected to early adopt the provisions of ASU 2011-08 in fiscal 2011.
ASU 2011-08 permits us to first assess qualitative factors to determine whether it is more-likely-than-not
that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it
is necessary to perform the two-step quantitative goodwill impairment test. Under the two-step
quantitative goodwill impairment test, the fair value of the reporting unit is compared to its respective
carrying amount including goodwill. If the fair value exceeds the carrying amount, then no impairment
exists. If the carrying amount exceeds the fair value, further analysis is performed to assess impairment.
Because market prices of our reporting units are not readily available, we make various estimates and
assumptions in determining the estimated fair values of our reporting units. The estimated fair value is
based on an income approach, with an appropriate risk adjusted discount rate, and a market approach
where appropriate. Significant assumptions inherent in the methodologies are employed and include such
estimates as discount rates, growth rates and certain market transaction multiples.
We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or
circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying
amount. Such tests are completed separately with respect to the goodwill of each of our reporting units.
Events or circumstances that might indicate an interim evaluation is warranted include, among other
factors, unexpected adverse business conditions, macro and reporting unit specific economic factors (for
example, deteriorating results in comparison to projections, commodity inflation, or loss of key
personnel), unanticipated competitive activities, and acts by governments or courts.
Under ASU 2011-08, companies can bypass the qualitative assessment and move directly to the
quantitative assessment for any reporting unit in any period if management believes that it is more
efficient or there is a risk of impairment. All companies can elect to resume performing the qualitative
assessment in any subsequent period. We applied the qualitative assessment for our domestic Company-
owned restaurants and China reporting unit, which is included in our international reporting segment. As
a result of our qualitative analysis, we determined that it was more-likely-than-not that the fair value of
our domestic Company-owned restaurants and China reporting unit were greater than their carrying
amounts.
With respect to the reporting unit for our subsidiary located in the United Kingdom (“PJUK”), which
represents $15.4 million of goodwill as of December 30, 2012, we bypassed the qualitative assessment
and performed the two-step quantitative goodwill impairment test, which indicated the fair value
exceeded the carrying amount by 37%. The fair value was calculated using an income approach that
projected net cash flow over a 10-year discrete period and a terminal value, which were discounted using
appropriate rates. The selected discount rate considers 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. 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. Future impairment charges could be required if adverse economic
events occur in the United Kingdom.