Shake Shack 2016 Annual Report Download - page 81

Table of Contents
Costs incurred when constructing Shacks are capitalized. The cost of repairs and maintenance are expensed when incurred. Costs for refurbishments and
improvements that significantly increase the productive capacity or extend the useful life of the asset are capitalized. When assets are disposed of, the resulting
gain or loss is recognized on the Consolidated Statements of Income (Loss).
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 its estimated
undiscounted future cash flows expected to be generated by the asset. 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 in fiscal 2015 , 2014 and 2013 .
Deferred Financing Costs
Deferred financing costs incurred in connection with the issuance of long-term debt and establishing credit facilities are capitalized and amortized to interest
expense based on the related debt agreements. Deferred financing costs are included in other assets on the Consolidated Balance Sheets.
Other Assets
Other assets consist primarily of long-term marketable securities, security deposits, transferable liquor licenses and certain custom furniture pre-ordered for future
Shacks and yet to be placed in service.
The costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. The costs of
purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived
intangible assets. Annual liquor license renewal fees are expensed over the renewal term. As of December 30, 2015 and December 31, 2014, indefinite-lived
intangible assets relating to transferable liquor licenses totaled $701 . We evaluate our indefinite-lived intangible assets for impairment annually during our fiscal
fourth quarter, and whenever events or changes in circumstances indicate that an impairment may exist. When evaluating other intangible assets for impairment,
we may first perform a qualitative assessment to determine whether it is more likely than not that an intangible asset group is impaired. If we do not perform the
qualitative assessment, or if we determine that it is not more likely than not that the fair value of the intangible asset group exceeds its carrying amount, we
calculate the estimated fair value of the intangible asset group. If the carrying amount of the intangible asset group exceeds the estimated fair value, an impairment
charge is recorded to reduce the carrying value to the estimated fair value. In addition, we continuously monitor and may revise our intangible asset useful lives if
and when facts and circumstances change.
Equity-based Compensation
Equity-based compensation expense is measured based on fair value. We recognize compensation expense on a straight-line basis over the requisite service period.
For awards with graded-vesting features and service conditions only, compensation expense is recognized on a straight-line basis over the total requisite service
period for the entire award. Equity-based compensation expense is included within general and administrative expenses on the Consolidated Statements of Income
(Loss).
Leases
We lease all of our domestic company-operated Shacks, our home office and certain equipment under various non-cancelable lease agreements that expire on
various dates through 2032. Generally, our real estate leases have initial terms ranging from 10 to 20 years and typically include two five -year renewal options. At
the inception of each lease, we determine its classification as an operating or capital lease. All of our leases are classified as operating leases and typically provide
for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified thresholds. When the achievement of such sales
thresholds are deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period. For operating leases that include rent
holidays and rent escalation clauses, we recognize rent expense on a straight-line basis over the lease term from the date we take possession of the leased property.
The difference between the straight-line rent amounts and amounts payable under the lease agreements is recorded as deferred rent and is included as rent expense
in occupancy and related expenses on the Consolidated Statements of Income (Loss). Rent expense incurred before a Shack opens is recorded in pre-opening costs.
79 | Shake Shack Inc. Form 10-K