Dallas-based Brinker now expects that its second quarter and fiscal 2005 net earnings will be reduced by approximately $1.2 million and $3.8 million, respectively.
The restaurant operator says that it resolved its dispute with the IRS concerning unreported cash tips for the calendar years 2000 to 2002. The resolution will result in a negative impact on net income of approximately $400,000 in the second quarter of fiscal2005.
While the restaurant operator contends that it was in full compliance with the Tip Reporting Alternative Commitment agreement and "that the IRS' retroactive revocation was unjustified," the company agreed to the resolution "to avoid potentially costly and protracted litigation."
Brinker paid an assessment of $17.3 million this month to the IRS and will record the amount in restaurant expenses in the second quarter of fiscal 2005. It expects to record an income tax benefit of approximately $16.9 million, consisting primarily of federal income tax credits related to excess FICA taxes.
In addition to the IRS resolution, the company is compelled to restate its earnings for 2002, 2003, 2004 and first quarter 2005 fiscal years because of a change in how it accounts for its straight-line rent expenses and the related deferred rent liability. The company will now recognize rent expense on a straight-line basis over sufficient renewal periods to equal the depreciable life of 20 years.
Brinker is certainly not alone when it comes to the accounting changes and restating earnings. Orlando, FL-based Darden Restaurants Inc. has done the same thing.
As a result, Brinker estimates that the cumulative effect of the restatement through fiscal 2004 will be an increase in the deferred rent liability of approximately $20.7 million and a decrease in intangible franchise rights of $4.4 million.
Moreover, the deferred income tax liability at the end of fiscal 2004 will decrease by approximately $9.4 million, and retained earnings at the end of fiscal 2004 will decrease by approximately $15.7 million.Rent expense for fiscal years ended 2002, 2003 and 2004 will increase by approximately $3.3 million, $3.9 million and $4.9 million, respectively, and for the first quarter of fiscal 2005 by approximately $1.3 million.
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