IHOP 2009 Annual Report Download - page 86

Goodwill has been allocated to 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 significant majority of the
Company’s goodwill resulted from the November 29, 2007 acquisition of Applebee’s and has been
allocated between the two Applebee’s units. The Company tests goodwill and other indefinite life
intangible assets for impairment on an annual basis in the fourth quarter. The annual impairment test
of goodwill of the two Applebee’s units is performed as of October 31 of each year. The annual
impairment test of the goodwill of the IHOP unit is performed as of December 31 of each year, the
date as of which the analysis has been performed in prior years. In addition to the annual test of
impairment, goodwill and indefinite life intangible assets must be evaluated more frequently if the
Company believes indicators of impairment exist. Such indicators include, but are not limited to, events
or circumstances such as a significant adverse change in the business climate, unanticipated
competition, a loss of key personnel, adverse legal or regulatory developments, or a significant decline
in the market price of the Company’s common stock.
In the process of the Company’s annual impairment review of goodwill, the Company primarily
uses the income approach method of valuation that includes the discounted cash flow method as well
as other generally accepted valuation methodologies to determine the fair 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 are made as to
proceeds to be received from future franchising of company-operated restaurants. Step one of the
impairment test compares the fair value of each of our reporting units to its carrying value. If the fair
value is in excess of the carrying value, no impairment exists. If the step one test does indicate an
impairment, step two must take place. Under step two, the fair value of the assets and liabilities of the
reporting unit are estimated as if the reporting unit were acquired in a business combination. The
excess of the fair value of the reporting unit over the carrying amounts assigned to its assets and
liabilities is the implied fair value of the goodwill, to which the carrying value of the goodwill must be
adjusted. The fair value of all reporting units is then compared to the current market value of the
Company’s common stock to determine if the fair values estimated in the impairment testing process
are reasonable in light of the current market value.
In the process of the Company’s annual impairment review of the tradename, the most significant
indefinite life intangible asset, the Company primarily uses 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.
Long-Lived Assets
We assess long-lived and intangible assets with finite lives for impairment when events or changes
in circumstances indicate that the carrying value of the assets may not be recoverable. We test
impairment using historical cash flows and other relevant facts and circumstances as the primary basis
for our estimates of future cash flows. We consider factors such as the number of years the restaurant
has been operated by us, sales trends, cash flow trends, remaining lease life, and other factors which
apply on a case-by-case basis. The analysis is performed at the individual restaurant level for indicators
of permanent impairment. Recoverability of the restaurant’s assets is measured by comparing the assets’
carrying value to the undiscounted 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, the carrying amount is written down to the
estimated fair value, and a loss resulting from impairment is recognized by charging to earnings. This
process requires the use of estimates and assumptions, which are subject to a high degree of judgment.
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