IHOP 2009 Annual Report Download - page 140

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
17. Impairments and Closure Charges (Continued)
effectiveness of those initiatives; (iii) while economic data confirmed that the U.S. economy had been
recessionary since December of 2007, there was still considerable uncertainty as to the depth and
duration of the slowdown, and although Applebee’s year-to-date same-store sales were lower than the
prior period, Applebee’s decline had been less that its competitors, such that the Company believed its
internal forecasts of same-store sales growth were achievable; and (iv) the Company’s net book value
was in excess of its market capitalization throughout the third quarter ended September 30, 2008, and
while the market capitalization did decline below the Company’s net book value subsequent to
September 30, 2008, by the October 31, 2008 date of filing its Form 10-Q for the Quarterly Period
ended September 30, 2008, the Company’s net book value was in excess of its market capitalization.
In the fourth quarter of 2008 the Company completed its annual test for impairment of goodwill.
We utilized a discounted cash flows model of the income approach to assess the fair value of our three
reporting units, the IHOP franchised restaurants unit (‘‘IHOP unit’’), Applebee’s company-operated
restaurants unit (‘‘Applebee’s company unit’’) and Applebee’s franchised restaurants unit (‘‘Applebee’s
franchise unit’’). The impairment test of goodwill of the two Applebee’s units which hold the significant
majority of the total goodwill was performed as of October 31, 2008. The impairment test of the
goodwill of the IHOP unit was performed as of December 31, 2008, the date as of which the analysis
has been performed in prior years.
The first step of the impairment test compared the fair value of each of our reporting units to
their carrying value. Significant assumptions used to determine fair value under the discounted cash
flows model include future trends in sales, operating expenses, overhead expenses, depreciation, capital
expenditures, and changes in working capital along with an appropriate discount rate. Additional
assumptions were made as to proceeds to be received from future franchising of company-operated
restaurants. Based on this first step, we concluded the fair the IHOP unit and the Applebee’s franchise
unit was in excess of their respective net carrying values and no impairment of goodwill was warranted.
However, the fair value of the Applebee’s company unit was less than the net carrying value of its
assets assigned, requiring the second step of the impairment test. In performing the second step of the
impairment test the Company concluded that the goodwill allocated to the Applebee’s company unit
was fully impaired and an impairment charge of $113.5 million was recorded. No tax benefit is
associated with the impairment of goodwill.
During the fourth quarter of 2008 the commercial real estate market continued to weaken, the
credit markets continued constrained, economic forecasts were uncertain as to how long the
recessionary period would last, and the Company’s stock price declined. The Company revised the
significant assumptions underlying the discounted cash flows model, primarily its 2009 revenue forecast
and the discount rate, and updated its impairment analysis of the Applebee’s franchise unit. The
Company determined the fair value of the Applebee’s franchise unit was in excess of its carrying value
as of December 31, 2008.
In addition, the Company performed an impairment test of its indefinite-lived intangible assets,
primarily the Applebee’s tradename assigned in the purchase price allocation. The Company utilized
the relief from royalty method under the income approach to determine the fair value of the
tradename. The Company determined the fair value of the tradename as of December 31, 2008 was
less than the carrying value. An impairment charge of $44.1 million was recorded with a tax benefit of
$17.3 million associated with the charge. The Company also recorded goodwill and fixed asset
impairment charges of $13.5 million related to company-operated restaurants expected to be franchised
in the fourth quarter.
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