Popeye's 2015 Annual Report Download - page 43

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 uncollectible amounts 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 $7.8 million at December 27, 2015 and $7.3 million at December 28, 2014, 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 27, 2015, we had approximately $1.3 million of
unrecognized tax benefits, $0.1 million of which, if recognized, would affect the effective tax rate. At December 27, 2015, 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 restricted
stock awards with service and market conditions are valued utilizing a Monte Carlo simulation model. The fair value of stock-
based compensation is amortized either on the graded vesting attribution method or on the cliff vesting attribution method
depending on the specific award. The Company issues new shares for common stock upon exercise of stock options. 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.
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