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9. Fair Value Measurement
Fair value measurements are made under a three-tier fair value hierarchy, which prioritizes the inputs used in the measuring of fair value:
Level One: Observable inputs that reflect unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level Two: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level Three: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in managements best estimate of fair value.
Assets and Liabilities Measured at Fair Value
The derivative liability associated with the interest rate swap is considered to be a Level Two instrument. The interest rate swap was a standard cash flow hedge with a fair value estimated using industry-standard valuation models. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves. See Note 8, Derivative and Other Comprehensive Income, for the discussion of the derivative liability.
The Companys deferred compensation plan is a nonqualified deferred compensation plan which allows highly compensated employees to defer a portion of their base salary, variable compensation and commissions each plan year. The carrying value of both the liability for the deferred compensation plan and associated life insurance policy are equal to their fair value. These agreements are required to be measured at fair value on a recurring basis and are valued using Level Two inputs. At October 2, 2011, and December 26, 2010, a liability for participant contributions and investment income thereon of $2.3 million and $2.6 million, respectively, is included in other non-current liabilities. To offset its obligation, the Companys plan administrator purchases corporate-owned whole-life insurance contracts on certain team members. The cash surrender value of these policies at October 2, 2011, and December 26, 2010, was $2.2 million and $2.5 million, respectively, and is included in other assets, net.
As of October 2, 2011, the Company had no financial assets or liabilities that were measured using Level One or Level Three inputs. The Company also had no non-financial assets or liabilities that were required to be measured at fair value on a recurring basis.
The following table presents our assets and liabilities that are fair valued on a recurring basis for the quarter ended October 2, 2011, and for the fiscal year ended December 26, 2010 (in thousands):
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October 2,
2011
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Level
One
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Level
Two
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|
Level
Three
|
|
|
Assets:
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|
|
|
|
|
|
|
|
|
|
Life insurance policy
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|
$
|
2,235
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|
$
|
|
|
$
|
2,235
|
|
$
|
|
|
|
Total assets measured at fair value
|
|
$
|
2,235
|
|
$
|
|
|
$
|
2,235
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Derivative - interest rate swap
|
|
$
|
673
|
|
$
|
|
|
$
|
673
|
|
$
|
|
|
|
Deferred compensation plan
|
|
2,301
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|
|
|
2,301
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
2,974
|
|
$
|
|
|
$
|
2,974
|
|
$
|
|
|
|
|
|
December
26, 2010
|
|
Level
One
|
|
Level
Two
|
|
Level
Three
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy
|
|
$
|
2,510
|
|
$
|
|
|
$
|
2,510
|
|
$
|
|
|
|
Total assets measured at fair value
|
|
$
|
2,510
|
|
$
|
|
|
$
|
2,510
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Derivative - interest rate swap
|
|
$
|
411
|
|
$
|
|
|
$
|
411
|
|
$
|
|
|
|
Deferred compensation plan
|
|
2,545
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|
|
|
2,545
|
|
|
|
|
Total liabilities measured at fair value
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|
$
|
2,956
|
|
$
|
|
|
$
|
2,956
|
|
$
|
|
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Disclosures of Fair Value of Other Assets and Liabilities
The Companys liabilities under its credit agreement and capital leases are carried at historical cost in the accompanying consolidated balance sheet. For disclosure purposes, we estimate the fair value of the credit facility and capital lease obligations using discounted cash flow analysis based on market rates obtained from independent third parties for similar types of debt. The inputs used to value both the credit facility and the Companys capital lease obligations are considered to be Level 2 instruments. The carrying amount of the Companys credit facility as of October 2, 2011, and December 26, 2010, was approximately $146.3 million and $147.0 million, respectively. The fair value of the Companys credit facility as of October 2, 2011, and December 26, 2010, was approximately $147.6 million and approximately $148.1 million, respectively. There are $10.8 million of outstanding borrowings recorded for the Companys capital leases as of October 2, 2011, which have an estimated fair value of $11.8 million. At December 26, 2010, the carrying amount of the Companys capital lease obligations was $11.6 million, and the fair value was $11.5 million.
Asset Impairment
The Company took a pre-tax impairment charge for one of its restaurants in the third quarter 2011of $1.9 million and four of its restaurants in the third quarter 2010 of $6.1 million. These are considered to be assets that are measured at fair value on a nonrecurring basis. The inputs used for the fair value measurement of the restaurants are considered Level Three. For further information refer to Note 2 Restaurant Impairment and Closures.
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