Shake Shack 2016 Annual Report Download - page 66

Table of Contents
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) requires that we make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base
our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing
basis.
The critical accounting policies and estimates describe below are those that materially affect or have the greatest potential impact on our our consolidated financial
statements, and involve difficult, subjective or complex judgments by management. Because of the uncertainty inherent in these matters, actual results may differ
from those estimates we use in applying our critical accounting policies and estimates. The following discussion should be read in conjunction with the
consolidated financial statements included in Part II, Item 8 of this Form 10-K.
Property and Equipment
We assess potential impairments to our long-lived assets, which includes property and equipment, whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of an asset is measured by a comparison of the carrying amount of an asset group to the estimated
undiscounted future cash flows expected to be generated by the asset. The evaluation is performed at the lowest level of identifiable cash flows, with is primarily at
the individual Shack level. Significant judgment is involved in determining the assumptions used in estimating future cash flows, including projected sales growth
and operating margins. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the
amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no impairment charges recorded during fiscal 2015, 2014 or 2013.
Leases
We currently lease all of our domestic company-operated Shacks and the home office. At the inception of each lease, we determine its appropriate classification as
an operating or capital lease. As of December 30, 2015 and December 31, 2014 there were no leases classified as capital leases. For operating leases that include
rent escalations, we record the base rent expense on a straight-line basis over the term of the lease and the difference between the base cash rents paid and the
straight-line rent expense is recorded as deferred rent. Certain leases contain contingent rent provisions that require additional rental payments based upon sales
volume. When achievement of such sales volume target is probable, contingent rent is accrued in proportion to the sales recognized during the period that are
attributable to the expected achievement of the sales volume target. It is our policy to record straight-line rent expense from possession date through the opening
date as pre-opening expense. Once a domestic company-operated Shack opens, we record the straight-line rent plus contingent rent, if applicable, as occupancy and
related expenses.
We expend cash for leasehold improvements and to build out and equip our leased premises. We may also expend cash for structural additions that we make to
leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed to us by our landlords as construction contributions
pursuant to agreed-upon terms in our leases. If obtained, landlord construction contributions usually take the form of up-front cash, full or partial credits against
our future minimum or percentage rents otherwise payable by us, or a combination thereof. When contractually due to us, we classify tenant improvement
allowances as deferred rent on the consolidated balance sheets and amortize the tenant improvement allowance on a straight-line basis over the lease term as a
credit to occupancy and related expenses.
We make judgments regarding the probable term for each lease, which can impact the classification and accounting for a lease as capital or operating, as well as
the amount of straight-lined rent expense and deferred rent expense in a particular period.
Self-Insurance Liabilities
We are self-insured for our employee medical plan and we recognize a liability that represents our estimated cost of claims incurred but not reported as of the
balance sheet date. Our estimated liability is based on a number of assumptions and factors, which requires significant judgment, including historical claims
experience, severity factors, litigation costs, inflation and other actuarial assumptions. Our history of claims experience is short and our significant growth rate
could affect the accuracy of our estimates. If
Shake Shack Inc. Form 10-K | 64