Note 2 - Summary of Significant Accounting Policies
|12 Months Ended|
Dec. 25, 2016
|Notes to Financial Statements|
|Significant Accounting Policies [Text Block]||
(2)Summary of Significant Accounting Policies
(a) Basis of Presentation
The Company utilizes a
53-week reporting period ending on the last Sunday of
December.The periods ended
2014)each had a
52-week reporting period. The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles and include the financial statements of Ruth’s Hospitality Group, Inc. and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current year presentation. Most significantly, the results of the Mitchell’s Restaurants have been reclassified as a discontinued operation.
(b) Recent Accounting Pronouncements
2014,the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
09,Revenue from Contracts with Customers, (ASU
09),which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers, and will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. The new standard is effective for interim and annual periods in fiscal years beginning after
2017,which will require the Company to adopt these provisions in the
firstquarter of fiscal
2018.The standard permits the use of either the retrospective or cumulative effect transition method and is expected to impact the Company’s recognition of revenue related to franchise development and site specific fees. The Company currently recognizes franchise development and site specific fees when new franchisee-owned restaurants open. Under ASU
09,development and site specific fees will be recognized over the life of the applicable franchise agreements. The Company expects that the new standard will have a material effect on the consolidated financial statements. The Company expects that the most significant change relates to an increase of approximately
$6million to the deferred revenue liability on the consolidated balance sheet for previously recognized franchise development and site specific fees that will be recognized over the life of the applicable franchise agreements under the new standard. In addition, ASU
09is expected to impact the classification of advertising contributions from franchisees. The Company currently records advertising contributions from franchisees as a liability against which specified advertising and marketing costs are charged. Under the new standard, advertising contributions from franchisees will be classified as franchise income on the consolidated statements of income. The Company recognized advertising contributions from franchisees totaling
$1.2million during fiscal years
2014,respectively, as a reduction to marketing and advertising expense on the consolidated statements of income. The Company is evaluating other potential effects that ASU
09will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method.
2015,the FASB issued ASU No.
330).The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. This pronouncement is effective for reporting periods beginning after
2016.The adoption of ASU
11is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.
2016,the FASB issued ASU
842).This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after
2018,which will require the Company to adopt these provisions in the
firstquarter of fiscal
2019using a modified retrospective approach. The Company’s restaurants operate under facility lease agreements that provide for material future lease payments (see Note
9).The restaurant facility leases comprise the majority of the Company’s material lease agreements. The Company is currently evaluating the effect of the standard on its ongoing financial reporting, but expects that the adoption of ASU
02will have a material effect on its consolidated financial statements. The Company expects that the most significant changes relate to
1)the recognition of new right-of–use assets and lease liabilities on the consolidated balance sheet for restaurant facility operating leases; and
2)the derecognition of existing lease liabilities on the consolidated balance sheet related to scheduled rent increases.
2016,the FASB issued ASU
09,Compensation – Stock Compensation (Topic
718).This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods beginning after
2016,which will require the Company to adopt these provisions in the
firstquarter of fiscal
2017.This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. The Company will adopt the new standard in the
firstquarter of fiscal year
2017.The primary impact to the Company’s financial statements will be the recognition of excess tax benefits and deficiencies as income tax benefits or expense on the consolidated statement of income, instead of in additional paid-in capital on the consolidated balance sheet. In addition, the cash flows related to excess tax benefits and deficiencies will be recorded as an operating activity on the statement of cash flows. The Company recognized excess tax benefits of
$1.9million in fiscal years
2014,respectively, in additional paid-in capital on the consolidated balance sheet.
2016the FASB issued ASU
15,Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic
230).This update was issued to standardize how certain transactions are classified on the statement of cash flows. This update is effective for fiscal years beginning after
2017.Early adoption is permitted. The adoption of ASU
15is not expected to have a significant impact of the Company’s ongoing financial reporting.
The Company recognizes liabilities for contingencies when there is an exposure that indicates it is both probable that an asset has been impaired or that a liability has been incurred and that the amount of impairment or loss can be reasonably estimated.
(d) Cash Equivalents
For purposes of the consolidated financial statements, the Company considers all highly liquid investments purchased with an original maturity of
threemonths or less to be cash equivalents. The Company has included outstanding checks totaling
2015in “Accounts payable” and “Accrued payroll” in the consolidated balance sheets. Changes in such amounts are reflected in cash flows from operating activities in the consolidated statements of cash flows.
Accounts receivable consists primarily of bank credit cards receivable, landlord contributions, franchise royalty payments receivable, receivables from gift card sales, banquet billings receivable and other miscellaneous receivables.
(f) Allowance for Doubtful Accounts
The Company performs a specific review of account balances and applies historical collection experience to the various aging categories of receivable balances in establishing an allowance.
Inventories consist of food, beverages and supplies and are stated at the lower of cost or market. Cost is determined using the
and Equipment, net
Property and equipment are stated at cost. Expenditures for improvements and replacements are capitalized and maintenance and repairs are charged to expense. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line basis over the shorter of the lease term or the estimated useful lives of the assets. The estimated useful lives for assets are as follows: Building and Building Improvements,
5years; Furniture and Fixtures,
7years; Computer Equipment,
5years; and Leasehold Improvements,
20years (limited by the lease term).
Goodwill acquired in a business combination that is determined to have an indefinite useful life is not amortized, but tested for impairment at least annually in accordance with the provisions of FASB ASC Topic
350,Intangibles-Goodwill and Other. Goodwill is tested annually for impairment on a reporting unit basis and more frequently if events and circumstances indicate that the asset might be impaired. For purposes of testing goodwill impairment, a reporting unit is defined as a group of restaurants with similar economic characteristics. An impairment loss is recognized to the extent that the financial statement carrying amount exceeds the asset’s fair value.
Franchise rights acquired prior to
2008in a purchase business combination that are determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually on a reporting unit basis, which is defined as a group of reacquired restaurants, and more frequently if events and circumstances indicate that the asset might be impaired. The Company allows and expects franchisees to renew agreements indefinitely ensuring consistent cash flows. As a result, franchise rights acquired prior to
2008are determined to have indefinite useful lives. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Franchise rights acquired after
2007are no longer considered to have indefinite useful lives and are amortized in accordance with FASB ASC Topic
or Disposal of Long-Lived Assets
In accordance with FASB ASC Topic
10,Property, Plant and Equipment—Impairment or Disposal of Long-Lived Assets, (Topic
10),long lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying amount of an asset
maynot be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the financial statement carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Key assumptions in the determination of fair value are the future after-tax cash flows of the restaurant and discount rate. The after-tax cash flows incorporate reasonable sales growth and margin improvement assumptions that would be expected by a franchisee in the determination of a purchase price for the restaurant. Estimates of future cash flows are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions. The discount rate used in the fair value calculations is our estimate of the required rate of return that a market participant would expect to receive when purchasing a similar restaurant or groups of restaurants and the related long-lived assets. The discount rate incorporates rates of returns for historical refranchising market transactions and is commensurate with the risks and uncertainty inherent in the forecasted cash flows.
We account for exit or disposal activities, including restaurant closures, in accordance with Topic
10.Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously closed restaurants. These costs are generally expensed as incurred. Additionally, at the date we cease using a property under an operating lease, we record a liability under FASB ASC Topic
420,Exit and Disposal Cost Obligations for the net present value of any remaining lease obligations, net of estimated sublease income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred. Upon disposal of the assets associated with a closed restaurant, any gain or loss is recorded in the same line within our consolidated statements of income as the original impairment.
) Deferred Financing Costs
Deferred financing costs represent fees paid in connection with obtaining bank and other long-term financing. The Company paid
financing costs during fiscal years
2014.The Company amortizes deferred financing costs using a method that approximates the effective interest method over the term of the related financing. Amortization of deferred financing costs was
thousand in each of the fiscal years
2014and is included in interest expense on the consolidated statements of income.
Revenues are derived principally from food and beverage sales. The Company does not rely on any major customers as a source of revenue.
Revenue from restaurant sales is recognized when food and beverage products are sold. Restaurant sales are presented net of sales taxes and discounts. Gratuities remitted by customers for the benefit of restaurant staff are not included in either revenues or operating expenses. Deferred revenue primarily represents the Company’s liability for gift cards that have been sold but not yet redeemed. When the gift cards are redeemed, the Company recognizes restaurant sales and reduces the deferred revenue liability. Company issued gift cards redeemed at franchisee-owned restaurants reduce the deferred revenue liability but do not result in Company restaurant sales. Gift card transactions involving franchisees are settled on a monthly basis through the Company’s
thirdparty gift card provider. The expected redemption value of gift cards represents the full value of all gift cards issued less the amount the Company has recognized as other operating income for gift cards that are not expected to be redeemed. The Company’s accounting method for recognizing breakage revenue is the redemption method. Under the redemption method, breakage revenue is recognized and the gift card liability is derecognized for unredeemed gift cards in proportion to actual gift card redemptions based on historical breakage rates. Gift card breakage revenue is classified as a component of other operating income. The Company recognized gift card breakage revenue of
$2.6million in fiscal years
(m) International Revenues
The Company currently has
20international franchisee-owned restaurants in Aruba, Canada, China, Indonesia, Japan, Mexico, Panama, Puerto Rico, Singapore, Taiwan and the United Arab Emirates. In accordance with its franchise agreements relating to these international restaurants, the Company receives royalty revenue from these franchisees in U.S. dollars. Franchise fee revenues from international restaurants were
$3.2million in fiscal years
Certain of the Company’s operating leases contain predetermined fixed escalations of the minimum rent during the term of the lease. For these leases, the Company recognizes the related rent expense on a straight-line basis over the life of the lease and records the difference between amounts charged to operations and amounts paid as deferred rent.
Additionally, certain of the Company’s operating leases contain clauses that provide additional contingent rent based on a percentage of sales greater than certain specified target amounts. The Company recognizes contingent rent expense prior to the achievement of the specified target that triggers the contingent rent, provided achievement of that target is considered probable.
Marketing and advertising expenses in the accompanying consolidated statements of income include advertising expenses of
$6.1million in fiscal years
2014,respectively. Advertising costs are expensed as incurred.
The Company maintains various policies for workers’ compensation, employee health, general liability and property damage. Pursuant to those policies, the Company is responsible for losses up to certain limits. The Company records liabilities for the estimated exposure for aggregate losses below those limits. The recorded liabilities are based on estimates of the ultimate costs to be incurred to settle known claims and claims incurred but not reported as of the balance sheet date. The estimated liabilities are not discounted and are based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions. Independent actuaries are used to develop estimates of the workers’ compensation, general and employee health care liabilities.
(q) Stock-Based Compensation
The Company recognizes stock-based compensation in accordance with FASB ASC Topic
718,Compensation—Stock Compensation, (Topic
718).Stock-based compensation cost includes compensation cost for all share-based payments granted based on the grant date fair value estimated in accordance with the provisions of Topic
718.Compensation cost is recognized on a straight-line basis over the requisite service period of each award.
Pre-opening costs incurred with the opening of new restaurants are expensed as incurred. These costs include rent expense, wages, benefits, travel and lodging for the training and opening management teams, and food, beverage and other restaurant operating expenses incurred prior to a restaurant opening for business.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company applies the provisions of FASB ASC Topic
740,Income Taxes (Topic
740requires that a position taken or expected to be taken in a tax return be recognized (or derecognized) in the financial statements when it is more likely than not 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
50%likely of being realized upon ultimate settlement. The Company’s continuing practice is to recognize interest and penalties related to uncertain tax positions in income tax expense.
Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is calculated by dividing net income by the diluted weighted average shares of common stock outstanding during each period. Potentially dilutive securities include shares of non-vested stock awards. Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an antidilutive effect. Stock awards are excluded from the calculation of diluted earnings per share in the event they are antidilutive.
) Restaurant Acquisition
2014,the Company acquired the Austin, TX Ruth’s Chris Steak House restaurant and franchise rights from the franchisee owner for
$2.8million in cash. The revenues and expenses of the acquired restaurant are included in the consolidated statements of income from the date of the acquisition.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://www.xbrl.org/2003/role/presentationRef