Popeye's 2013 Annual Report Download - page 46

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With respect to contingent liabilities, we similarly reserve for such contingencies when we are able to assess that
an expected loss is both probable and reasonably estimable.
Leases. When determining the lease term, we often include option periods for which failure to renew the lease
imposes a penalty in such an amount that a renewal appears, at the inception of the lease, to be reasonably assured. We
record rent expense for leases that contain scheduled rent increases on astraight-line basis over the lease term, including
any option periods considered in the determination of that lease term. Contingent rentals are generally based on sales
levels in excess of stipulated amounts, and thus are not considered minimum lease payments and are included in rent
expense as they accrue.
Deferred TaxAssets and Tax Reserves. We make certain estimates and judgments in determining income tax expense
for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and
liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial
statement purposes.
We assess the likelihood that we will be able to recover our deferred tax assets. We consider historical levels of
income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance. If recovery is not likely, we increase our
provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately
be recoverable. We carried a valuation allowance on our deferred tax assets of $6.3 million at December 29, 2013 and
$5.9 million at December 30, 2012, based on our view that it is more likely than not that we will not be able to take a
tax benefit for certain state operating loss carryforwards which continue to expire.
The Company recognizes the benefit of positions taken or expected to be taken in atax return in the financial
statements when it is more likely than not (i.e. alikelihood of more than fifty percent) that the position would be
sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of
benefit that is greater than fifty percent likely of being realized upon settlement. Changes in judgment that result in
subsequent recognition, derecognition or change in a measurement of atax position taken in aprior annual period
(including any related interest and penalties) is recognized as a discrete item in the interim period in which the change
occurs. At December 29, 2013, we had approximately $1.4 million of unrecognized tax benefits, $0.2 million of which,
if recognized, would affect the effective tax rate. At December 29, 2013,the Company had approximately $0.1 million
of accrued interest and penalties related to uncertain tax positions.
See Note 18 to the Consolidated Financial Statements included in this Form 10-K for afurther discussion of our
income taxes.
Stock-Based Compensation Expense The Company measures and recognizes stock-based compensation expense
at fair value for all share-based payments, including stock options, restricted stock awards and restricted share units.
The fair value of stock options with only service conditions are estimated using a Black-Scholes option-pricing model.
The fair value of stock options with service and market conditions are valued utilizing aMonte Carlo simulation
embedded in alattice model. The fair value of stock-based compensation is amortized on the graded vesting attribution
method. Our option pricing models require various highly subjective and judgmental assumptions including risk-free
interest rates, expected volatility of our stock price, expected forfeiture rates, expected dividend yield and expected
term. If any of the assumptions used in the models change significantly, share-based compensation expense may differ
materially in the future from that recorded in the current period. Our specific weighted average assumptions used to
estimate the fair value of stock-based employee compensation are set forth in Note 13 to the Consolidated Financial
Statements included in this Form 10-K.
Accounting Standards Adopted in 2013
In July 2012, the FASB issued guidance on testing indefinite-lived intangible assets for impairment. The guidance
allows an entity the option first to assess qualitative factors to determine whether the existence of events and
circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after
assessing the totality of events and circumstances, an entity concludes that is not more likely than not that the indefinite-
lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes