IHOP 2009 Annual Report Download - page 138

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
17. Impairments and Closure Charges (Continued)
common stock. In performing the impairment review of the tradename intangible asset, the Company
primarily used the relief of royalty method under income approach method of valuation. Significant
assumptions used to determine fair value under the relief of royalty method include future trends in
sales, a royalty rate and a discount rate to be applied to the forecast revenue stream. During the course
of fiscal 2009, the Company made periodic assessments as to whether there were indicators of
impairment, particularly with respect to the significant assumptions noted above. In the first half of the
year, same-store sales trends were within the range of the forecast used in the assessment. During the
third quarter of 2009, same-store sales trended below the forecast range; however, during 2009 there
were also indications that a lessening of underlying risk might result in a lower discount rate as well. As
a result of these assessments the Company determined an interim test of indefinite-lived intangibles
was not necessary.
During the fourth quarter of 2009, the Company performed the annual test of impairment
indefinite-lived intangibles. The Company revised downwards the same-store sales change assumption in
its five-year forecast. The Company also revised downward the assumed discount rate. All other
assumptions used in the discounted relief from royalty calculation were unchanged. As the result of the
revised assumptions, the estimated fair value of the tradename was less than the carrying value and an
impairment of $93.5 million was recognized.
On a quarterly basis, the Company assesses whether events or changes in circumstances have
occurred that potentially indicate the carrying value of tangible long-lived assets may not be
recoverable. Recoverability of a restaurant’s assets is measured by comparing the assets’ carrying value
to the undiscounted future cash flows expected to be generated over the assets’ remaining useful life or
remaining lease term, whichever is less. If the total expected undiscounted future cash flows are less
than the carrying amount of the assets, this may be an indicator of impairment. If it is decided that
there has been an impairment, the carrying amount of the asset is written down to the estimated fair
value. The fair value is determined by discounting the future cash flows from the asset, based on our
cost of capital. We believe this method provides a reasonable estimate of the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (an exit price).
Throughout 2009, the Company recognized impairments of long-lived tangible assets of
$10.4 million. The impaired assets comprised three IHOP company-operated restaurants, various assets
related to one IHOP franchise restaurants, one Applebee’s company-operated restaurant, a write-down
to the estimated sales value, based on a current letter of intent, of one Applebee’s restaurant that had
been closed in a prior period and was included in assets held for sale and four parcels of Applebee’s
real estate. The Company had fee ownership of the properties on which four Applebee’s
company-operated restaurants were located. These restaurants were franchised in the fourth quarter of
2008 but the Company retained ownership of the land and continued to lease the property to the
franchisee. The Company’s strategy does not contemplate retaining such properties as a lessor on a
long-term basis. During the third quarter of 2009, the Company determined the properties met the
requirements under U.S. GAAP to be reclassified as assets held for sale. The properties were written
down to the estimated fair value that will be received upon sale. The Company evaluated the causal
factors of all impairments of long-lived assets as they were recorded during 2009 and concluded they
were based on factors specific to each asset and not potential indicators of an impairment of long-lived
assets as a whole.
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