IHOP 2010 Annual Report Download - page 104

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
operations and franchise operations for the years ended December 31, 2010, 2009 and 2008 was
$32.2 million, $36.7 million and $45.3 million, respectively. In addition, significant advertising expenses
also are incurred by franchisees through the national advertising funds and local marketing and
advertising cooperatives.
Asset Retirement Obligations
The Company currently has certain leases which may require it to return the property to the
landlord in its original condition. The Company records expenses for these leases in its consolidated
financial statements as company restaurant expenses. At December 31, 2010 and 2009, the liability
recorded for asset retirement obligations was $0.2 million and $0.3 million, respectively.
Derivative Financial Instruments
The Company accounts for derivative instruments and hedging activities in accordance with
U.S. GAAP. All derivatives are recognized on the balance sheet at their fair value. On the date that the
Company enters into a derivative contract, management formally documents all relationships between
hedging instruments and hedged items, as well as risk management objectives and strategies for
undertaking various hedge transactions.
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies
as a cash flow hedge (a ‘‘swap’’), to the extent that the hedge is effective, are recorded in accumulated
other comprehensive income, until earnings are affected by the variability of cash flows of the hedged
transaction. The Company measures effectiveness of the swap at each quarter end, using the
hypothetical derivative method. Under this method, hedge effectiveness is measured based on a
comparison of the change in fair value of the actual swap designated as the hedging instrument and the
change in fair value of the hypothetical swap which would have the terms that identically match the
critical terms of the hedged cash flows from the anticipated debt issuance. The amount of
ineffectiveness, if any, recorded in earnings would be equal to the excess of the cumulative change in
the fair value of the swap over the cumulative change in the fair value of the plain vanilla swap lock, as
defined in the accounting literature. Once a swap is settled, the effective portion is amortized over the
estimated life of the hedged item.
In the past, the Company has utilized derivative financial instruments to manage its exposure to
interest rate risks, but is not currently a party to any derivative financial instruments. The Company
does not enter into derivative financial instruments for trading purposes.
Fair Value Measurements
The Company determines the fair market values of its financial assets and liabilities, as well as
non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis,
based on the fair value hierarchy established in U.S. GAAP. The Company measures its financial assets
and liabilities using inputs from the following three levels of the fair value hierarchy. The three levels
are as follows:
• Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access at the measurement date.
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