Popeye's 2015 Annual Report Download - page 67

Popeyes Louisiana Kitchen, Inc.
Notes to Consolidated Financial Statements
For Fiscal Years 2015, 2014, and 2013 — (Continued)
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.
Debt Issuance Costs. Costs incurred to secure new debt facilities are capitalized and then amortized utilizing a method that
approximates the effective interest method for term loans and the straight-line method for revolving credit facilities. Absent a
basis for cost deferral, debt amendment fees are expensed as incurred. In the Company’s Consolidated Statements of Operations,
the amortization of debt issuance costs, any write-off of debt issuance costs when a debt facility is modified or prematurely paid
off, and debt amendment fees are included as a component of “Interest expense, net.” During 2013, the Company wrote off $0.4
million due to the retirement of the 2010 Credit Facility.
Advertising Cooperative. The Company maintains an advertising cooperative that receives contributions from the Company
and from its franchisees, based upon a percentage of restaurant sales, as required by their franchise agreements. This cooperative
is used exclusively for marketing of the Popeyes brand. The Company acts as an agent for the franchisees with regards to their
contributions to the advertising cooperative.
In the Company’s consolidated financial statements, contributions received and expenses of the advertising cooperative are
excluded from the Company’s Consolidated Statements of Operations and the Consolidated Statements of Cash Flow. The
Company reports all assets and liabilities of the advertising cooperative as “Advertising cooperative assets, restricted” and
“Advertising cooperative liabilities” in the Consolidated Balance Sheet. The advertising cooperatives assets, consisting primarily
of cash and accounts receivable from the franchisees, can only be used for selected purposes and are considered restricted. The
advertising cooperative liabilities represent the corresponding obligation arising from the receipt of the contributions to purchase
advertising and promotional programs.
The Company’s contributions to the advertising cooperative based on company-operated restaurant sales are reflected in the
Company’s Consolidated Statements of Operations as a component of “Restaurant employee, occupancy and other expenses.”
Additional contributions to the advertising cooperative for national media advertising and other marketing related costs are
expensed as a component of “General and administrative expenses.” During 2015, 2014, and 2013, the Company’s advertising
costs were approximately $5.4 million, $3.9 million, and $3.4 million, respectively.
Leases. When determining the lease term, the Company includes option periods for which failure to renew the lease imposes
economic penalty on the Company in such an amount that a renewal appears, at the inception of the lease, to be reasonably
assured. The lease term commences on the date when the Company has the right to control the use of the leased property, which
can occur before the rent payments are due under the terms of the lease.
The Company records 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.
Tenant improvement allowances and other lease incentives are recognized as reductions to rent expense on a straight-line
basis over the lease term.
Accumulated Other Comprehensive Loss. Comprehensive income (loss) is net income plus the change in fair value of the
Company’s cash flow hedge discussed in Note 9 plus derivative (gains) or losses realized in earnings during the period. Amounts
included in accumulated other comprehensive income (loss) for the Company’s derivative instruments are recorded net of the
related income tax effects.
As of December 27, 2015, accumulated other comprehensive loss consisted of derivitive losses associated with the company's
interest rate swap agreements. As of December 28, 2014, accumulated other comprehensive loss consisted of net unrealized
losses on interest rate swap agreements settled in cash and derivative gains realized during the period. Unrealized derivative
gains or losses on terminated swap agreements are amortized as interest expense over the remaining term of the original swap
agreement. The Company reclassified $0.2 million and $0.8 million of net pre-tax derivative losses into earnings in 2015 and
2014, respectively. See Note 9 for further discussion of the Company’s interest rate swap agreements.
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