Accounting for variable interest entity. Papa John’s International operates a chain of pizza restaurants, using a combination of company-owned units and franchised units. Franchisees own the franchised units, although they rely on Papa John’s International for a portion of their financing. An important ingredient in pizza is cheese, which has price variations depending on supply and demand conditions in the market. Papa John’s International and its franchisees have entered into a purchasing arrangement with BIBP for the purchase of cheese Exhibit 13.20 presents the disclosure by Papa John’s International of its relation to BIBP, a variable interest entity. Discuss whether Papa John’s International should prepare consolidated financial statements with BIBP.

Disclosures by Papa john’s International Relating to a Variable Interest Entity EXHIBIT 13.20 (Problem 34

5. Accounting for Variable Interest Entities

FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (FIN 46), provides a framework for identifying variable interest entities (VIEs) and determining when a company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements. In general a VIE is a corporation, partnership, limited liability company, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb Losses or the right to receive returns generated by its operations.

FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIEs activities, is entitled to receive a majority of the VIEs residual returns (if no party absorbs a majority of the VIEs losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities and non-controlling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest.

We have a purchasing arrangement with BIBP, a special-purpose entity, for the sole purpose of reducing cheese price volatility to domestic systemwide restaurants. BIBP is an independent, franchisee-owned corporation. BIBP purchases cheese at the market price and sells it to our distribution subsidiary. PJ Food Service, Inc. (PJFS), at a fired quarterly price based in part upon historical average market prices. PJFS in turn sells cheese to Papa John’s restaurants (both Company-owned and franchised) at a set quarterly price. PJFS purchased $138.2 million, $144.1 million and $151.9 million of cheese from BIBP during 2007, 2006 and 2005, respectively. We recognize the operating losses generated by BIBP if BIBP’s shareholders’ equity is in a net deficit position. Further, we recognize the subsequent operating income generated by BIBP up to the amount of any losses previously recognized. We recognized a pre-tax loss of $31.7 million, a pre-tax gain of $19.0 million, and a pre-tax gain of $4.5 million in 2007, 2006 and 2005, respectively, reflecting BIBFs operating income (losses), net of BIBP’s shareholders’ equity.

BIBP has a $20.0 million line of credit with a commercial bank, which is not guaranteed by Papa John’s. Papa John’s has agreed to provide additional funding in the form of a loan to BIBP. As of December 30, 2007, BIBP had borrowings of $6.7 million and a letter of credit of $3.0 million outstanding under the commercial tine of credit facility and $20.5 million raider the line of credit from Papa John’s. As of December 31, 2006, BIBP had borrowings of $525,000 and a letter of credit of $3.0 million outstanding under the commercial Line of credit facility (no outstanding borrowings from Papa John’s). BIBP had outstanding borrowings of $13.6 million under the commercial bank facility and $23.6 million under the line of credit from Papa John’s as of February 19, 2008.