IHOP 2010 Annual Report Download - page 101

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
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 of our goodwill and
intangible assets. 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 based on the
Company’s estimated cost of equity capital and after-tax cost of debt. 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 their 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 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.
There were no impairments of goodwill or intangible assets recorded in 2010. As a result of the
impairment reviews performed in 2009, an impairment of intangible assets was recorded. As a result of
the impairment reviews performed in 2008, impairments of goodwill and intangible assets were
recorded, including all of the goodwill of the Applebee’s company unit. See Note 17, Impairment and
Closure Charges.
Self-Insurance Liability
The Company is self-insured for a portion of its employee workers’ compensation and general
liability insurance obligations. The Company maintains stop-loss coverage with third-party insurers to
limit its total exposure. The accrued liability associated with these programs is based on historical
claims data and our estimate of the ultimate costs to be incurred to settle known claims and claims
incurred but not reported as of the balance sheet date. The estimated liability is not discounted and is
based on a number of assumptions and factors, including historical trends, actuarial assumptions and
economic conditions. If actual trends, including the severity or frequency of claims, differ from our
estimates, our financial results could be impacted.
Revenue Recognition
The Company’s revenues are recorded in four categories: franchise operations, company restaurant
operations, rental operations and financing operations.
The franchise operations revenue consists primarily of royalty revenues, sales of proprietary IHOP
products, IHOP advertising fees and the portion of the franchise fees allocated to the Company’s
intellectual property. Company restaurant sales are retail sales at company-operated restaurants. Rental
operations revenue includes revenue from operating leases and interest income from direct financing
leases. Financing operations revenue consists of the portion of franchise fees not allocated to the
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