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Update to Significant Accounting Policies | 3 Months Ended
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Mar. 29, 2020
Update to Significant Accounting Policies |
Update to Significant Accounting Policies |
2. | Update to Significant Accounting Policies
​ Use of Estimates ​ The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant items that are subject to such estimates and assumptions include allowance for doubtful accounts and notes receivable, intangible assets, contract assets and contract liabilities, including the online customer loyalty program obligation, right-of-use assets and lease liabilities, gift card breakage, insurance reserves and tax reserves. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates. ​ Variable Interest Entity ​ Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States for the purpose of designing and administering advertising and promotional programs. PJMF is a variable interest entity (“VIE”) that funds its operations with ongoing financial support and contributions from the domestic restaurants, of which approximately 80% are franchised, and does not have sufficient equity to fund its operations without these ongoing financial contributions. Based on an assessment of the governance structure and operating procedures of PJMF, the Company determined it has the power to control certain significant activities of PJMF, and therefore, is the primary beneficiary. The Company has consolidated PJMF in its financial results in accordance with Accounting Standards Codification (“ASC”) 810, “Consolidations.” ​ Noncontrolling Interests ​ Papa John’s has four joint venture arrangements in which there are noncontrolling interests held by third parties that include 192 restaurants at March 29, 2020. At March 31, 2019, there were 183 restaurants held in three joint ventures. ​ Consolidated net income (loss) is required to be reported separately at amounts attributable to both the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners, including a disclosure on the face of the Condensed Consolidated Statements of Operations of income attributable to the noncontrolling interest holders. ​ The income before income taxes attributable to these joint ventures for the three months ended March 29, 2020 and March 31, 2019 was as follows (in thousands): ​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | ​ | ​ | ​ | ​
​ |  | Three Months Ended
​ | ​ | March 29, | ​ | March 31,
​ |  | 2020 |  | 2019
​ | ​ | ​ | ​ | ​ | ​ | ​
Papa John’s International, Inc. | ​ | $ | 1,131 | ​ | $ | 464
Noncontrolling interests | ​ |  | 550 | ​ |  | 133
Total income before income taxes | ​ | $ | 1,681 | ​ | $ | 597
​ The following summarizes the redemption feature, location and related accounting within the Condensed Consolidated Balance Sheets for these joint venture arrangements: ​
​ | ​ | ​ | ​ | ​
​ |  | ​ |  | ​
Type of Joint Venture Arrangement |  | Location within the Balance Sheets |  | Recorded Value
​ | ​ | ​ | ​ | ​
Joint ventures with no redemption feature |  | Permanent equity |  | Carrying value
Joint ventures with option to require the Company to purchase the noncontrolling interest - not currently redeemable or redemption not probable |  | Temporary equity |  | Carrying value
​ Deferred Income Tax Accounts and Tax Reserves ​ We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining Papa John’s provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. The effective income tax rate includes the estimated domestic state effective income tax rate and applicable foreign income tax rates. The effective income tax rate is also impacted by various permanent items and credits, net of any related valuation allowances, and can vary based on changes in estimated annual income. Discrete items are recorded in the quarter in which they occur. ​ Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax attribute carryforwards (e.g., net operating losses, capital losses, and foreign tax credits). The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. ​ Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues on a quarterly basis to adjust for events, such as statute of limitations expirations, court or state rulings or audit settlements, which may impact our ultimate payment for such exposures. ​ Fair Value Measurements and Disclosures ​ The Company is required to determine the fair value of financial assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Fair value is a market-based measurement, not an entity-specific measurement. The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash and cash equivalents, accounts receivable, net of allowances, and accounts payable. The carrying value of notes receivable, net of allowances, also approximates fair value. The fair value of the amounts outstanding under our term debt and revolving credit facility approximate their carrying values due to the variable market-based interest rate (Level 2). ​ Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following categories: ​
| ● | Level 1: Quoted market prices in active markets for identical assets or liabilities.
| ● | Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
| ● | Level 3: Unobservable inputs that are not corroborated by market data.
​ Our financial assets and liabilities that were measured at fair value on a recurring basis as of March 29, 2020 and December 29, 2019 are as follows (in thousands):
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Carrying | ​ | Fair Value Measurements |
​ |  | Value |  | Level 1 |  | Level 2 |  | Level 3 |
March 29, 2020 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Financial assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash surrender value of life insurance policies (a) | ​ | $ | 27,787 | ​ | $ | 27,787 | ​ | $ | — | ​ | $ | — | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Financial liabilities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate swaps (b) | ​ |  | 17,020 | ​ |  | — | ​ |  | 17,020 | ​ |  | — | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
December 29, 2019 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Financial assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash surrender value of life insurance policies (a) | ​ | $ | 33,220 | ​ | $ | 33,220 | ​ | $ | — | ​ | $ | — | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Financial liabilities: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate swaps (b) | ​ |  | 6,168 | ​ |  | — | ​ |  | 6,168 | ​ |  | — | ​
(a) | Represents life insurance policies held in our non-qualified deferred compensation plan.
(b) | The fair value of our interest rate swaps is based on the sum of all future net present value cash flows. The future cash flows are derived based on the terms of our interest rate swaps, as well as considering published discount factors, and projected London Interbank Offered Rates (“LIBOR”).
​ ​ Accounting Standards Adopted ​ Financial Instruments – Credit Losses ​ In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected versus incurred losses for financial assets held. The Company adopted ASU 2016-13 as of December 30, 2019 (the first day of fiscal 2020) under the modified retrospective transition method. Financial instruments subject to ASU 2016-13 include trade accounts receivable, notes receivable and interest receivable (classified as Other assets in the Condensed Consolidated Balance Sheet) from franchisees. The impact of the adoption was not material to our condensed consolidated financial statements. Upon adoption, the Company recorded a cumulative effect adjustment to retained earnings of $1.1 million, net of $0.3 million of income taxes, on the opening Condensed Consolidated Balance Sheet as of December 30, 2019. ​ Estimates of expected credit losses, even if remote, are based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics, and macroeconomic factors. Credit quality is monitored through the timing of payments compared to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer. ​ The following table summarizes changes in our allowances for credit losses for accounts receivable, notes receivable and interest receivable: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​
(in thousands) | Accounts Receivable | ​ | Notes Receivable | ​ | Interest Receivable
Balance at December 29, 2019 | $ | 7,341 | ​ | $ | 3,572 | ​ | $ | 910
Cumulative effect of adoption of ASU 2016-13 | ​ | 911 | ​ | ​ | 463 | ​ | ​ | -
Balance at December 30, 2019 | ​ | 8,253 | ​ | ​ | 4,035 | ​ | ​ | 910
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Current period provision for expected credit losses | ​ | 625 | ​ | ​ | - | ​ | ​ | 144
Write-offs charged against the allowance | ​ | (380) | ​ | ​ | - | ​ | ​ | -
Recoveries collected | ​ | - | ​ | ​ | (22) | ​ | ​ | -
Balance at March 29, 2020 | $ | 8,498 | ​ | $ | 4,013 | ​ | $ | 1,054
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ Accounting Standards to be Adopted in Future Periods ​ Reference Rate Reform – Hedging ​ In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU is intended to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. This guidance was effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its condensed consolidated financial statements and related disclosures. ​ ​ ​ ​ ​

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