Dunkin' Donuts 2012 Annual Report Download - page 58

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straight-line method. Our amortizable intangible assets are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of the intangible asset may not be recoverable. An intangible asset that is
deemed impaired is written down to its estimated fair value, which is based on discounted cash flow.
Income taxes
Our major tax jurisdictions are the U.S. and Canada. The majority of our legal entities were converted to limited liability
companies (“LLCs”) on March 1, 2006 and a number of new LLCs were created on or about March 15, 2006. All of these
LLCs are single member entities which are treated as disregarded entities and included as part of us in the consolidated federal
income tax return. Dunkin’ Brands Canada Ltd. (“DBCL”) files separate Canadian and provincial tax returns, and Dunkin
Brands (UK) Limited, Dunkin’ Brands Australia Pty. Ltd (“DBA”), and Baskin-Robbins Australia Pty. Ltd (“BRA”) file
separate tax returns in the United Kingdom and Australia. The current income tax liabilities for DBCL, Dunkin Brands (UK)
Limited, DBA, and BRA are calculated on a stand-alone basis. The current federal tax liability for each entity included in our
consolidated federal income tax return is calculated on a stand-alone basis, including foreign taxes, for which a separate
company foreign tax credit is calculated in lieu of a deduction for foreign withholding taxes paid. As a matter of course, we are
regularly audited by federal, state, and foreign tax authorities.
Deferred tax assets and liabilities are recorded for the expected future tax consequences of items that have been included in our
consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences
between the financial statement carrying amounts of assets and liabilities and the respective tax bases of assets and liabilities
using enacted tax rates that are expected to apply in years in which the temporary differences are expected to reverse. The
effects of changes in tax rates on deferred tax assets and liabilities are recognized in the consolidated statements of operations
in the year in which the law is enacted. Valuation allowances are provided when we do not believe it is more likely than not that
we will realize the benefit of identified tax assets.
A tax position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than
not that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the
largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Estimates of interest and
penalties on unrecognized tax benefits are recorded in the provision for income taxes.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
Legal contingencies
We are engaged in litigation that arises in the ordinary course of business as a franchisor. Such matters typically include
disputes related to compliance with the terms of franchise and development agreements, including claims or threats of claims of
breach of contract, negligence, and other alleged violations by us. We record reserves for legal contingencies when information
available to us indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably
estimated. Predicting the outcomes of claims and litigation and estimating the related costs and exposures involve substantial
uncertainties that could cause actual costs to vary materially from estimates. Legal costs incurred in connection with legal and
other contingencies are expensed as the costs are incurred.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign exchange risk
We are subject to inherent risks attributed to operating in a global economy. Most of our revenues, costs and debts are
denominated in U.S. dollars. Our investments in, and equity income from, joint ventures are denominated in foreign currencies,
and are therefore subject to foreign currency fluctuations. For fiscal year 2012, a 5% change in foreign currencies relative to the
U.S. dollar would have had a $1.1 million impact on equity in net income of joint ventures. Additionally, a 5% change in
foreign currencies as of December 29, 2012 would have had an $8.7 million impact on the carrying value of our investments in
joint ventures. In the future, we may consider the use of derivative financial instruments, such as forward contracts, to manage
foreign currency exchange rate risks.