Dunkin' Donuts 2015 Annual Report Download - page 61

-51-
such guarantees. The fair value of a guarantee is based on historical default rates of our total guaranteed loan pool. We monitor
the financial condition of our franchisees and record provisions for estimated losses on guaranteed liabilities of our franchisees
if we believe that our franchisees are unable to make their required payments. As of December 26, 2015, if all of our
outstanding guarantees of franchisee financing obligations came due simultaneously, we would be liable for approximately $2.0
million. As of December 26, 2015, we had recorded an immaterial amount of reserves for such guarantees. We generally have
cross-default provisions with these franchisees that would put the franchisee in default of its franchise agreement in the event of
non-payment under such loans. We believe these cross-default provisions significantly reduce the risk that we would not be
able to recover the amount of required payments under these guarantees and, historically, we have not incurred significant
losses under these guarantees due to defaults by our franchisees.
Impairment of equity method investments
We evaluate our equity method investments for impairment whenever an event or change in circumstances occurs that may
have a significant adverse impact on the fair value of the investment. If a loss in value has occurred and is deemed to be other
than temporary, an impairment loss is recorded. We review several factors to determine whether a loss has occurred that is other
than temporary, including absence of an ability to recover the carrying amount of the investment, the length and extent of the
fair value decline, and the financial condition and future prospects of the investee.
As more fully described in note 6 to the consolidated financial statements included herein, we recorded an impairment of our
investment in the Japan JV in the fourth quarter of fiscal year 2015 of $54.3 million, resulting in a carrying value of our
investment in the Japan JV of approximately $8.7 million as of December 26, 2015. The fair value of the investment was
determined with the assistance of a third-party valuation specialist using a combination of market and income approaches to
valuation. Although public shareholders do hold a minority stake in the Japan JV, it was determined that the public stock price
was not indicative of fair value. This determination was based primarily on the limited trading volumes of the Japan JV’s shares
relative to other more liquid securities, the lack of market reaction to the sustained underperformance of the Japan JV and other
public disclosures, and the unsupportable implied valuation multiples of the public stock price relative to peer companies and
the Japan JV’s historical valuation multiples.
In performing the valuation, the market-based approach was based on multiples of the Japan JV’s historical and projected
earnings before interest, taxes, depreciation, and amortization (“EBITDA”) utilizing trading multiples of a selected peer group
of companies. The income approach utilized the discounted cash flow method, which determined enterprise value based on the
present value of estimated future net cash flows the Japan JV is expected to generate over a forecasted three-year period plus
the present value of estimated cash flows beyond that period based on a level of growth in perpetuity. These two approaches
were then weighted equally to determine a single total equity value. The significant assumptions underlying the market-based
approach were the EBITDA multiples applied of between 5.5x and 6.0x. The significant assumptions underlying the income
approach were the discount rate applied of 11.6% and the EBITDA perpetuity growth rate of 5.0%.
The impairment of our investment in the Japan JV is reflected as a reduction to the Company’s equity method investments in
the consolidated balance sheet as of December 26, 2015. As the Company had previously recorded a step-up in the basis of our
investment in the Japan JV comprising amortizable franchise rights and nonamortizable goodwill, the impairment was first
allocated to fully impair these investor-level assets. The remaining impairment was recorded to the underlying assets of the
Japan JV by fully impairing the underlying property, plant, and equipment, net of any related tax impact, with any residual
impairment allocated ratably to other non-financial long-term assets.
Impairment of goodwill and other intangible assets
Goodwill and trade names (“indefinite-lived intangibles”) have been assigned to our reporting units, which are also our
operating segments, for purposes of impairment testing. All of our reporting units have indefinite-lived intangibles associated
with them.
We evaluate the remaining useful life of our trade names to determine whether current events and circumstances continue to
support an indefinite useful life. In addition, all of our indefinite-lived intangible assets are tested for impairment annually. We
first assess qualitative factors to determine whether it is more likely than not that a trade name is impaired. In the event we
were to determine that the carrying value of a trade name would more likely than not exceed its fair value, quantitative testing
would be performed. Quantitative testing consists of a comparison of the fair value of each trade name with its carrying value,
with any excess of carrying value over fair value being recognized as an impairment loss. For goodwill, we first perform a
qualitative assessment to determine if the fair value of the reporting unit is more likely than not greater than the carrying
amount. In the event we were to determine that a reporting unit’s carrying value would more likely than not exceed its fair
value, quantitative testing would be performed which consists of a comparison of each reporting unit’s fair value to its carrying
value. The fair value of a reporting unit is an estimate of the amount for which the unit as a whole could be sold in a current