Popeye's 2014 Annual Report Download - page 45

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growth rates could result in future impairment of the recorded goodwill. If we believe the risks inherent in the business increase,
the resulting change in the discount rate could also result in future impairment of the recorded goodwill.
Fair Value Measurements. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability (exit
price) in an orderly transaction between market participants. For those assets and liabilities recorded or disclosed at fair value, we
determine fair value based upon the quoted market price, if available. If a quoted market price is not available for identical assets,
we determine fair value based upon the quoted market price of similar assets or the present value of expected future cash flows
considering the risks involved, including counterparty performance risk if appropriate, and using discount rates appropriate for
the duration. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the
calculation.
Level 1 Inputs based upon quoted prices in active markets for identical assets.
Level 2
Inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or
indirectly.
Level 3 Inputs that are unobservable for the asset.
Allowances for Accounts and Notes Receivable and Contingent Liabilities. We reserve a franchisee’s receivable balance based
upon pre-defined aging criteria and upon the occurrence of other events that indicate that we may or may not collect the balance
due. In the case of notes receivable, we perform this evaluation on a note-by-note basis, whereas this analysis is performed in the
aggregate for accounts receivable. We provide for an allowance for uncollectibility based on such reviews.
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 a straight-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 Tax Assets 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 $7.3 million at December 28, 2014 and $6.3 million at December 29, 2013, 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 a tax return in the financial statements when
it is more likely than not (i.e. a likelihood 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 a tax position taken in a prior 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 28, 2014 , we had approximately $1.3 million of unrecognized
tax benefits, $0.2 million of which, if recognized, would affect the effective tax rate. At December 28, 2014, 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 a further 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 a Monte Carlo simulation embedded in a lattice model. The fair value of
stock-based compensation is amortized on the graded vesting attribution method. Our option pricing models require various highly