Popeye's 2014 Annual Report Download - page 44

26
(4) We have not included in the contractual obligations table approximately $1.3 million for uncertain tax positions we have
taken on tax returns. These liabilities may increase or decrease over time as a result of tax examinations, and given the status
of the examinations, we cannot reliably estimate the amount or period of cash settlement, if any, with the respective taxing
authorities. These liabilities also include amounts that are temporary in nature and for which we anticipate that over time
there will be no net cash outflow.
Off-Balance Sheet Arrangements
The Company has no significant Off-Balance Sheet Arrangements.
Impact of Inflation
The impact of inflation on the cost of food, labor, fuel and energy costs, and other commodities has influenced our operating
expenses. To the extent permitted by the competitive environment in which we operate, increased costs are partially recovered
through menu price increases coupled with purchasing prices and productivity improvements.
Critical Accounting Policies and Estimates
Our significant accounting policies are presented in Note 2 to our Consolidated Financial Statements included in this Form 10-
K. Of our significant accounting policies, we believe the following involve a higher degree of risk, judgment and/or complexity.
These policies involve estimations of the effect of matters that are inherently uncertain and may significantly impact our quarterly
or annual results of operations or financial condition. Changes in the estimates and judgments could significantly affect our results
of operations, financial condition and cash flows in future years.
Impairment of Long-Lived Assets. We evaluate property and equipment for impairment during the fourth quarter of each year
or when circumstances arise indicating that a particular asset may be impaired. For property and equipment at company-operated
restaurants, we perform our annual impairment evaluation on an individual restaurant basis. We evaluate restaurants using a “two-
year history of operating losses” as our primary indicator of potential impairment. We evaluate recoverability based on the
restaurant’s forecasted undiscounted cash flows for the expected remaining useful life of the unit, which incorporate our best
estimate of sales growth and margin improvement based upon our plans for the restaurant and actual results at comparable
restaurants. The carrying values of restaurant assets that are not considered recoverable are written down to their estimated fair
market value, which we generally measure by discounting estimated future cash flows. We performed our annual evaluation of
property and equivalent during the fourth quarter 2014 and determined that no impairment was indicated.
Estimates of future cash flows are highly subjective judgments and can be significantly impacted by changes in the business
or economic conditions. The discount rate used in the fair value calculations is our estimate of the required rate of return that a
third party would expect to receive when purchasing a similar restaurant and the related long-lived assets. We believe the discount
is commensurate with the risks and uncertainty inherent in the forecasted cash flows.
Impairment of Goodwill and Indefinite Lived Intangible Assets. We evaluate goodwill and indefinite lived assets for
impairment on an annual basis (during the fourth quarter of each year) or more frequently when circumstances arise indicating
that a particular asset may be impaired. Our goodwill impairment evaluation includes a comparison of the fair value of our reporting
units with their carrying value. Our reporting units are our business segments. Intangible assets, including goodwill, are allocated
to each reporting unit. The estimated fair value of each reporting unit is the amount for which the reporting unit could be sold in
a current transaction between willing parties. We estimate the fair value of our reporting units using a discounted cash flow model
or market price, if available. The operating assumptions used in the discounted cash flow model are generally consistent with the
reporting unit’s past performance and with the projections and assumptions that are used in our current operating plans. Such
assumptions are subject to change as a result of changing economic and competitive conditions. The discount rate is our estimate
of the required rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes
a reporting unit. We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash flows.
If a reporting unit’s carrying value exceeds its fair value, goodwill is written down to its implied fair value. The Company follows
a similar analysis for the evaluation of trademarks, recipes and formulas, and other indefinite lived intangible assets but that analysis
is performed on a company-wide basis.
During the fourth quarter of fiscal year 2014, we performed our annual assessment of recoverability of goodwill and indefinite
lived assets and determined that no impairment was indicated. Our Company-operated restaurants segment has goodwill of
$2.2 million as of the end of 2014. The assumptions used in determining fair value for this reporting unit are generally consistent
with the reporting unit’s past performance and with the projections and assumptions that are used in the Company’s current operating
plans. While our operating assumptions reflect what we believe are reasonable and achievable growth rates, failure to realize these