Papa Johns 2014 Annual Report Download - page 40

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27
Our specific assumptions for estimating the fair value of options include the following:
2014 2013 2012
Assumptions (weighted average):
Risk-free interest rate 1.8% 1.1% 1.1%
Expected dividend yield 1.0% 0.1% 0.0%
Expected volatility 35.7% 37.5% 37.8%
Expected term (in years) 6.0 6.0 6.0
The risk-free interest rate for the periods within the contractual life of an option is based on the U.S.
Treasury yield curve in effect at the time of grant. The expected dividend yield was estimated as the
annual dividend divided by the market price of the Company’s shares on the date of grant. Expected
volatility was estimated by using the Company’s historical share price volatility for a period similar to the
expected life of the option. See “Note 18” of “Notes to Consolidated Financial Statements” for additional
information.
Intangible Assets – Goodwill
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,
which includes our domestic Company-owned restaurants, China and the United Kingdom (“PJUK”).
We may perform a qualitative assessment or move directly to the quantitative assessment for any
reporting unit in any period if we believe that it is more efficient or if impairment indicators exist. We
elected to perform the two-step quantitative assessment for all reporting units in 2014.
Our domestic Company-owned restaurants fair value calculation considered both an income approach and
a market approach and our China and United Kingdom fair value calculations considered an income
approach. The income approach used projected net cash flows, with various growth assumptions, over a
ten-year discrete period and a terminal value, which were discounted using appropriate rates. The selected
discount rate considered the risk and nature of each reporting unit’s cash flow and the rates of return
market participants would require to invest their capital in the reporting unit. In determining the fair value
from a market approach, we considered earnings before interest, taxes, depreciation and amortization
(“EBITDA”) multiples that a potential buyer would pay based on third-party transactions in similar
markets.
The results of our quantitative assessments indicated the fair values significantly exceeded the carrying
amounts. Subsequent to completing our annual quantitative goodwill impairment tests, no indications of
impairment were identified.
Insurance Reserves
Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability,
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. See “Note 12” of “Notes to Consolidated Financial Statements” for additional
information.