Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
Dec. 31, 2013 |
Basis of Presentation and Principles of Consolidation | ' |
Basis of Presentation and Principles of Consolidation |
The consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and transactions have been eliminated in consolidation. |
The Company operates three business segments: company-owned restaurant operations, manufacturing operations, and franchising and licensing operations. These reportable segments are supported by the Company’s corporate unit. The company-owned restaurants segment includes brands that have similar investment criteria and economic and operating characteristics. The manufacturing segment produces and distributes bagel dough and other products to the Company’s restaurants and other third parties. The franchise and license segment earns royalties and other fees from the use of trademarks and operating systems developed for the Company’s brands. |
Information regarding the revenues and costs of sales for each business segment has been reported in Note 19 for fiscal years 2011, 2012 and 2013. |
Fiscal Year | ' |
Fiscal Year |
The Company has a 52/53-week fiscal year ending on the Tuesday closest to December 31. Fiscal years 2012 and 2013 ended on January 1, 2013 and December 31, 2013, respectively, and each contained 52 weeks. Fiscal year 2011 ended on January 3, 2012 and contained 53 weeks. |
Use of Estimates | ' |
Use of Estimates |
The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions for the reporting period and as of the reporting date. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingencies. Actual results could differ from those estimates. |
Fair Value Measurements | ' |
Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP requires fair value measurement to be classified and disclosed in one of the following three categories: |
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| • | | Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | | | | | | | | | |
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| • | | Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. | | | | | | | | | |
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| • | | Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). | | | | | | | | | |
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The Company’s financial instruments typically consist of cash equivalents, accounts receivable, accounts payable and debt. The fair values of accounts receivable and accounts payable approximate their carrying values, due to their short-term maturities. As of January 1, 2013 and December 31, 2013, total debt under the Company’s amended and restated credit facility was $136.7 million and $107.0 million, respectively, and had a fair value of $136.7 million and $107.2 million, respectively. The fair value of the Company’s debt was estimated based on current rates found in the market place for debt with the same remaining maturities (a level 2 input). |
Cash and Cash Equivalents | ' |
Cash and Cash Equivalents |
Cash and cash equivalents consist of cash on hand and highly liquid instruments with original maturities of three months or less when purchased. Amounts in-transit from credit card processors are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. |
Restricted Cash | ' |
Restricted Cash |
The Company’s restricted cash consists of funds paid by franchisees that are earmarked as advertising fund contributions. |
Accounts Receivable | ' |
Accounts Receivable |
The majority of the Company’s receivables are due from franchisees, licensees, distributors and trade customers. The Company determines an allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss and payment history, the customer’s current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole. |
Inventories | ' |
Inventories |
Inventories, which consist of food, beverage, paper supplies and bagel ingredients, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. |
Property, Plant and Equipment | ' |
Property, Plant and Equipment |
Property, plant and equipment (including leasehold improvements) are recorded at cost or, in the case of a business combination, at fair value. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of their useful lives or the non-cancelable lease term. In circumstances where failure to exercise a renewal option would result in the Company incurring an economic penalty, those option periods are included when determining the depreciation period. In either case, the Company’s policy requires consistency when calculating the depreciation period, in classifying the lease and in computing straight-line rent expense. Costs incurred to repair and maintain the Company’s facilities and equipment are expensed as incurred. The estimated useful lives used for financial statement purposes are: |
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Store and manufacturing equipment | | 5 years | | | | | | | | | | |
Furniture and fixtures | | 5 years | | | | | | | | | | |
Office and computer equipment | | 3 - 7 years | | | | | | | | | | |
Vehicles | | 5 years | | | | | | | | | | |
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The Company has determined that the economic useful life for leasehold improvements on new restaurants should be the shorter of 10 years or the life of the lease, which is typically 10 years. The Company also determined that the economic useful lives of our restaurant upgrades should be the shorter of 5 years or the life of the lease. However, as the Company approves restaurants to be upgraded, it simultaneously reviews the lease, and typically only upgrades those locations that have a lease with a renewal option and reasonable assurance such lease will be renewed. |
Capitalization of Internal Development Costs | ' |
Capitalization of Internal Development Costs |
The Company capitalizes direct costs associated with the site acquisition and subsequent construction of a company-owned restaurant on that site, including direct internal payroll and payroll-related costs. The Company only capitalizes those site-specific costs incurred subsequent to the time that the site acquisition is considered probable. If the Company makes the determination that a site for which internal development costs have been capitalized will not be subsequently acquired or developed, any previously capitalized internal development costs will be written off to general and administrative expenses. |
Impairment of Long-Lived Assets | ' |
Impairment of Long-Lived Assets |
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. For the purpose of reviewing restaurant assets for indicators of potential impairment, assets are grouped together at the market level. The Company manages its restaurants by market with significant common costs and promotional activities which are generally not clearly identifiable with an individual restaurant’s cash flows. Site specific indicators of impairment, if present, are also considered. Recoverability of restaurant assets is measured by a comparison of the carrying amount of an individual restaurant’s assets to the estimated identifiable undiscounted future cash flows expected to be generated by those restaurant assets. If the carrying amount of an individual restaurant’s assets exceeds its estimated identifiable undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the assets exceeds its fair value. Generally, a restaurant’s identifiable future cash flows are discounted to estimate its fair value. |
The Company determined there were no impairments for fiscal years 2011, 2012 and 2013. |
Goodwill, Trademarks and Other Intangibles | ' |
Goodwill, Trademarks and Other Intangibles |
The Company’s goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in various business combinations. The Company also has other intangibles that consist mainly of trademarks, trade secrets and patents. |
The Company’s goodwill and other indefinite lived intangible assets are not subject to amortization, but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. The Company follows a two-step approach for testing impairment, using nonrecurring Level 3 inputs. For goodwill, the fair value of each reporting unit is compared to its carrying value to determine whether an impairment indicator exists. If a potential impairment is indicated, the fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. For indefinite lived intangibles, the fair value is compared to the carrying value. The amount of impairment for goodwill and other intangible assets is measured as the excess of its carrying amount over its fair value. |
As of January 3, 2012, January 1, 2013 and December 31, 2013, the Company performed impairment analyses of its goodwill and indefinite lived intangible assets. The Company found no indication of impairment resulting from its goodwill and intangible asset impairment analyses for fiscal years 2011, 2012 and 2013. |
Business Combinations | ' |
Business Combinations |
The Company allocates the purchase price of an acquired business to its net identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. The Company uses all available information to estimate fair values including the fair value determination of identifiable intangible assets such as franchise rights, and any other significant assets or liabilities. In making these determinations, the Company may use the assistance of an independent third party valuation group. |
Debt Issuance Costs | ' |
Debt Issuance Costs |
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense based on the related debt agreement using the straight-line method, which approximates the effective interest method. |
Self-Insurance Reserves | ' |
Self-Insurance Reserves |
The Company uses a combination of insurance and self-insurance mechanisms to provide for potential liabilities for workers’ compensation, general liability and healthcare benefits. The Company maintains coverage with third party insurers which limit the total exposure from medical, workers’ compensation and general liability claims. The self-insurance medical liability, insured workers’ compensation and general liability represent an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated liabilities are established based upon the Company’s analysis of historical data to ensure that the recorded liability is appropriate. The Company’s financial statements could be impacted if actual claims differ from these estimates. The estimated workers’ compensation liability is established based on actuarial estimates, is discounted at 10% based upon a discrete analysis of actual claims and historical data and is reviewed on a quarterly basis to ensure that the liability is appropriate. These estimated liabilities are included in accrued expenses in the accompanying consolidated balance sheets. |
Income Taxes | ' |
Income Taxes |
The Company computes income taxes using the asset and liability method. Under this method, deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income statement purposes, using the enacted statutory rate in effect for the year these differences are expected to be taxable or refunded. Deferred income tax expenses or credits are based on the changes in the asset or liability, respectively, from period to period. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carry forwards. If the Company determines that a deferred tax asset could be realized in a greater or lesser amount than recorded, the asset’s recorded amount is adjusted and the income statement is either credited or charged, respectively, in the period during which the determination is made. |
The Company reduces its deferred tax assets by a valuation allowance if it determines that it is more likely than not that some portion or all of these tax assets will not be realized. In making this determination, the Company considers various qualitative and quantitative factors, such as: |
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| • | | the level of historical taxable income; | | | | | | | | | |
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| • | | the projection of future taxable income over periods in which the deferred tax assets would be deductible; | | | | | | | | | |
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| • | | events within the restaurant industry; | | | | | | | | | |
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| • | | the cyclical nature of the Company’s business; | | | | | | | | | |
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| • | | the health of the economy; and | | | | | | | | | |
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| • | | historical trending. | | | | | | | | | |
As of January 3, 2012, the Company had a valuation allowance of approximately $4.8 million established against its deferred tax assets. This valuation allowance was applied against net operating losses (“NOLs”) that will expire prior to their utilization. During fiscal 2012, the Company eliminated these NOLs and accordingly eliminated the related valuation allowance. |
The Company recognizes the tax benefit from an uncertain tax position when it determines that it is more-likely-than-not that the position would be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If the Company derecognizes an uncertain tax position, the Company’s policy is to record any applicable interest and penalties within the provision for income tax. |
Revenue Recognition | ' |
Revenue Recognition |
Company-owned restaurant sales – The Company records revenue from the sale of food, beverage and retail items as products are sold. Sales tax amounts collected from customers that are remitted to governmental authorities are excluded from net revenue. |
Manufacturing and commissary revenues – Manufacturing and commissary revenues are recorded at the time of shipment to customers. The Company produces bagels for sale to third party resellers, including sales to a wholesaler and a distributor who take possession in the United States and sell outside of the United States. As the product is shipped FOB domestic dock, invoiced in U.S. dollars and paid in U.S. dollars, the Company is not exposed to international risks of loss or foreign currency exchange issues. Shipping charges billed to third parties are recognized as revenue, and the related shipping costs are included in manufacturing and commissary costs. Approximately $7.1 million, $9.4 million and $10.4 million of sales shipped internationally are included in manufacturing and commissary revenues for fiscal years 2011, 2012 and 2013, respectively. All of the Company’s commissaries were closed by the first quarter of fiscal 2012. |
Franchise and license related revenues – Initial fees received from a franchisee or licensee to establish a new location are recognized as income when the Company has performed its obligations required to assist the franchisee or licensee in opening a new location, which is generally at the time the franchisee or licensee commences operations. Continuing royalties are calculated as a percentage of the net sales of the Company’s franchised and licensed locations. Franchise and license related revenues for fiscal years 2011, 2012 and 2013 include the following: |
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| | Fiscal Year Ended | |
| | January 3, | | | January 1, | | | December 31, | |
2012 | 2013 | 2013 |
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Royalties | | $ | 9,457 | | | $ | 10,452 | | | $ | 11,481 | |
Fees | | | 873 | | | | 734 | | | | 1,053 | |
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Total | | $ | 10,330 | | | $ | 11,186 | | | $ | 12,534 | |
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Deferred franchise and license revenue, which is included in other liabilities on the consolidated balance sheets, are summarized as follows: |
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| | January 1, | | | December 31, | | | | | |
2013 | 2013 | | | | |
| | (in thousands) | | | | | |
Deferred franchise and license revenue—current | | | 495 | | | | 719 | | | | | |
Deferred franchise and license revenue—long-term | | | 563 | | | | 740 | | | | | |
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Deferred franchise and license revenue | | $ | 1,058 | | | $ | 1,459 | | | | | |
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Gift Cards – Proceeds from the sale of gift cards are recorded as deferred revenue within accrued expenses, and recognized as revenue when redeemed by the holder. There are no expiration dates on the Company’s gift cards and the Company does not charge any service fees that would result in a decrease to a customer’s available balance. |
While the Company will continue to honor all gift cards presented for payment, it may determine the likelihood of redemption to be remote for certain gift card balances due to, among other things, long periods of inactivity. In these circumstances, to the extent the Company determines there is no requirement for remitting balances to government agencies under unclaimed property laws, outstanding gift card balances may then be recognized as breakage in the consolidated statements of income and comprehensive income as a component of company-owned restaurant sales. |
Income from gift card breakage was $0.2 million, $0.9 million and $0.8 million for fiscal years 2011, 2012 and 2013, respectively. |
Preopening Costs | ' |
Pre-opening Costs |
Pre-opening costs, including rent, wages, food, marketing and other restaurant operating costs, are expensed as incurred prior to a restaurant opening for business. |
Advertising Costs | ' |
Advertising Costs |
The Company expenses advertising costs as incurred except for expenses related to the development and production of a major commercial or media campaign which are expensed during the period in which the advertisement is first presented by the media. Advertising costs were $9.8 million, $11.4 million and $10.9 million for fiscal years 2011, 2012 and 2013, respectively, and are included in company-owned restaurant costs in the consolidated statements of income and comprehensive income. The Company had $0.8 million and $0.5 million of prepaid advertising expenses as of January 1, 2013 and December 31, 2013, respectively, which are included as a component of prepaid expenses on the consolidated balance sheets. |
Leases and Deferred Rent | ' |
Leases and Deferred Rent |
The Company leases all of its restaurant properties under operating leases. The Company also has equipment leases that qualify as either an operating lease or capital lease. |
For a lease that contains rent escalations, the Company records the total rent payable during the lease term on a straight-line basis over the term of the lease and records the difference between rent paid and the straight-line rent expense as deferred rent payable. Incentive payments received from landlords are recorded as an increase to deferred rent payable and are amortized on a straight-line basis over the lease term as a reduction of rent. As of January 1, 2013 and December 31, 2013, the Company had $6.2 million and $8.0 million, respectively, of deferred rent payable, net of landlord incentives, recorded as a component of other liabilities on the consolidated balance sheets. |
Net Income per Common Share | ' |
Net Income per Common Share |
The Company computes basic net income per common share by dividing the net income available to common stockholders for the period by the weighted-average number of shares of common stock outstanding during the period. |
Diluted net income per share is computed by dividing the net income available to common stockholders for the period by the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period using the treasury stock method. Potential common stock equivalents include incremental shares of common stock issuable upon the exercise of stock options and warrants. Potential common stock equivalents are excluded from the computation of diluted net income per share when their effect is anti-dilutive. |
The following table summarizes the weighted-average number of common shares outstanding, as well as sets forth the computation of basic and diluted net income per common share for the periods: |
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| | Fiscal Year Ended | |
| | January 3, | | | January 1, | | | December 31, | |
2012 | 2013 | 2013 |
| | | (in thousands, except earnings per share and related | |
share information) | |
Net income available to common stockholders (a) | | $ | 13,203 | | | $ | 12,741 | | | $ | 14,565 | |
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Basic weighted average shares outstanding (b) | | | 16,629,098 | | | | 16,935,018 | | | | 17,373,396 | |
Dilutive effect of stock options, SARs and RSUs | | | 251,223 | | | | 282,162 | | | | 440,001 | |
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Diluted weighted average shares outstanding (c) | | | 16,880,321 | | | | 17,217,180 | | | | 17,813,397 | |
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Net income available to common stockholders per share—Basic (a)/(b) | | $ | 0.79 | | | $ | 0.75 | | | $ | 0.84 | |
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Net income available to common stockholders per share—Diluted (a)/(c) | | $ | 0.78 | | | $ | 0.74 | | | $ | 0.82 | |
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Anti-dilutive stock options, SARs and RSUs | | | 405,374 | | | | 622,731 | | | | 227,123 | |
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Stock-Based Compensation | ' |
Stock-Based Compensation |
The Company maintains several equity incentive plans under which it may grant non-qualified stock options, incentive stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”) or restricted stock to employees, non-employee directors and consultants. Restricted stock and RSUs are valued using the closing stock price on the date of grant. The fair value of an option award or SAR is determined using the Black-Scholes option pricing model, which incorporates ranges of assumptions for inputs. The Company’s assumptions are as follows: |
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| • | | Expected Term—The expected term of options is based upon evaluations of historical and expected future exercise behavior. | | | | | | | | | |
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| • | | Risk Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. | | | | | | | | | |
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| • | | Implied Volatility—Implied volatility is based on the mean reverting average of the Company’s historical stock volatility and that of an industry peer group. The Company believes that the use of mean reversion is supported by evidence of a correlation between stock price volatility and a company’s leverage, combined with the effects that mandatory principal payments will have on the Company’s capital structure, as defined under its debt facility. | | | | | | | | | |
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| • | | Dividend Yield—The Company declared dividends in fiscal 2011, fiscal 2012 and fiscal 2013, and anticipates that it will continue to pay dividends in the future, at the discretion of its Board of Directors (the “Board”). The payment of dividends is dependent on a variety of factors, including available cash and the overall financial condition of the Company. | | | | | | | | | |
Under the plans, vesting of awards can either be based on the passage of time or on the achievement of performance goals. For awards that vest on the passage of time, compensation cost is recognized using a graded vesting attribution method over the vesting period. For performance based awards, the Company will recognize compensation costs over the requisite service period when conditions for achievement become probable. The Company also estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ or are expected to differ. |
Concentrations of Risk | ' |
Concentrations of Risk |
The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances and management believes its credit risk to be minimal. |
The Company purchases a majority of its frozen bagel dough from a single supplier who utilizes the Company’s proprietary processes and on whom the Company is dependent in the short-term. The Company also purchases all of its cream cheese from a single source. The Company has not experienced significant difficulties with its suppliers, but the reliance on a limited number of suppliers subjects the Company to a number of risks, including possible delays or interruption in supplies, diminished control over quality and a potential lack of adequate raw material capacity. Any disruption in the supply or degradation in the quality of the materials provided by the suppliers could have a material adverse effect on the Company’s business, including its ability to develop a strong brand identity and a loyal customer base. This could have a detrimental effect on the Company’s operating results and financial condition. |
Recent Accounting Pronouncements | ' |
Recent Accounting Pronouncements |
In July 2012, the Financial Accounting Standards Board (“FASB”) issued guidance that simplifies how entities test indefinite-lived intangible assets and permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of an intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform the currently required quantitative fair value assessment. The guidance became effective for the Company at the beginning of the first quarter of 2013. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. |
In February 2013, the FASB issued guidance requiring an entity to disclose additional information about reclassifications out of accumulated other comprehensive income, including (1) changes in accumulated other comprehensive income balances by component and (2) significant items reclassified out of accumulated other comprehensive income and the effect on the respective line items in net income if the amounts are required to be reclassified in their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The new guidance is effective prospectively for fiscal years beginning after December 15, 2012. The adoption of these disclosure requirements did not have a material impact on the Company’s consolidated financial statements. |
In July 2013, the FASB issued guidance permitting companies to use the Federal Funds Effective Swap Rate (or Overnight Index Swap Rate) as a U.S. benchmark interest rate for hedge accounting purposes. The guidance also removes the restriction on using different benchmark rates for similar hedges. The guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this guidance did not have any effect on the Company’s consolidated financial statements. |
In July 2013, the FASB issued guidance requiring an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new guidance is effective for fiscal years beginning after December 15, 2013, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this statement on the Company’s consolidated financial statements. |