IHOP 2009 Annual Report Download - page 116

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
6. Goodwill (Continued)
used to estimate the capitalization rate in the preliminary allocation was based in part on industry data,
the reporting of which lagged the actual timing by several months. Once data on capitalization rates
being utilized in late November 2007 became available, the Company updated the capitalization rate
assumptions accordingly. As a result of this additional information on capitalization rates the estimated
fair value of property and equipment was revised downwards approximately $14 million. The
corresponding offset to these revisions was an increase to goodwill of $91.5 million, net of deferred
taxes, recorded in 2008.
After the revisions to the estimated purchase price allocation, the goodwill arising from the
acquisition of Applebee’s totaled $811.5 million, of which $124.8 million was assigned to Applebee’s
company-operated restaurant reporting unit (the ‘‘Company unit’’) and $686.7 million to Applebee’s
franchise reporting unit (the ‘‘franchise unit’’). Consistent with the Company’s intent to franchise the
significant majority of the company-operated Applebee’s restaurants acquired on November 29, 2007,
the Company determined the fair value of the Company unit for purposes of assigning goodwill to be
the estimated sales value of the restaurants, the value that a market participant would have paid to
purchase the restaurants on the day following the acquisition. The fair value of the Company unit was
based on a multiple of approximately six times the operating cash flow for the trailing twelve months of
the company unit. This multiple was supported by actual refranchising transactions negotiated within a
month after the acquisition. The fair value of the franchise unit was determined using a discounted
cash flow based on forecast royalty revenues from the franchise operations. These fair values, which
reconciled to the overall purchase price paid to acquire Applebee’s, were then used to assign goodwill
between the reporting units as the excess of the estimated fair value of over the carrying value (as of
November 29, 2007) of each reporting unit. The goodwill resulting from this acquisition is not expected
to be deductible for tax purposes.
During 2008 the Company completed several refranchising transactions involving components of
the Company unit (see Note 4, Assets Held For Sale). The goodwill of the Company unit was reduced
by $11.3 million for the goodwill allocated to these restaurants.
In performing the 2008 annual impairment test of goodwill, the Company concluded the remaining
goodwill allocated to the Company unit was fully impaired and an impairment charge of $113.5 million
was recorded (see Note 17, Impairment and Closure Charges).
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