Chili's 2012 Annual Report Download - page 56

amounts stipulated in certain restaurant leases and are included in rent expense as they are incurred. Landlord
contributions are recorded when received as a deferred rent liability and amortized as a reduction of rent expense
on a straight-line basis over the lesser of the lease term, including renewal options, or 20 years.
(k) Advertising
Advertising production costs are expensed in the period when the advertising first takes place. Other
advertising costs are expensed as incurred. Advertising costs, net of advertising contributions from franchisees,
were $80.4 million, $80.2 million and $80.6 million in fiscal 2012, 2011, and 2010, respectively, and are
included in restaurant expenses in the consolidated statements of income.
(l) Goodwill
Goodwill is not subject to amortization, but is tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired. Goodwill has been assigned to reporting units
for purposes of impairment testing. Our two restaurant brands, Chili’s and Maggiano’s, are both reporting units
and operating segments. We have established that the appropriate level to evaluate goodwill is at the operating
segment level. The menu items, services offered and food preparation are virtually identical at each restaurant
within the reporting unit and our targeted customer is consistent across each brand. We maintain a centralized
purchasing department which manages all purchasing and distribution for our restaurants. In addition, contracts
for our food supplies are negotiated at a consolidated level in order to secure the best prices and maintain similar
quality across all of our brands. Local laws, regulations and other issues may result in slightly different legal and
regulatory environments; however, the overall regulatory climate within and across our operating segments is
quite similar. As such, we believe that aggregating components is appropriate for the evaluation of goodwill.
Goodwill impairment tests consist of a comparison of each reporting unit’s fair value with its carrying
value. We determine fair value based on a combination of market based values and projected discounted future
operating cash flows of the restaurant brands using a risk adjusted discount rate that is commensurate with the
risk inherent in our current business model. If the carrying value of a reporting unit exceeds its fair value,
goodwill is written down to its implied fair value. We determined that there was no goodwill impairment during
our annual test and no indicators of impairment were identified through the end of fiscal year 2012. See Note 5
for additional disclosures related to goodwill.
We have occasionally acquired restaurants from our franchisees. Goodwill from these acquisitions
represents the excess of the cost of a business acquired over the net amounts assigned to assets acquired,
including identifiable intangible assets, primarily reacquired franchise rights. In connection with the sale of
restaurants, we have allocated goodwill from the reporting unit, or restaurant brand, to the disposal group in the
determination of the gain or loss on the disposition. The allocation was based on the relative fair values of the
disposal group and the portion of the reporting unit that was retained. We have recognized reacquired rights in
connection with previous business combinations; however, we have not sold any restaurants acquired in those
combinations. When we have disposed a restaurant brand and all related restaurants, the entire goodwill balance
associated with the reporting unit or brand has been included in the disposal group for purposes of determining
the gain or loss on the disposition.
(m) Liquor Licenses
The costs of obtaining non-transferable liquor licenses from local government agencies are expensed over
the specified term of the license. The costs of purchasing transferable liquor licenses through open markets in
jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible
assets and included in other assets. Liquor licenses are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
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