IHOP 2010 Annual Report Download - page 113

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
6. Goodwill (Continued)
In accordance with U.S GAAP, goodwill must be evaluated for impairment, at a minimum, on an
annual basis, and 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, the Company primarily uses the income approach
method of valuation that utilizes a discounted cash flow model to estimate the fair value of its
reporting units. 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.
During fiscal 2010 and 2009, the Company made periodic assessments as to whether there were
indicators of impairment, particularly with respect to the significant assumptions underlying the
discounted cash flow model, and determined an interim test of goodwill was not warranted.
Accordingly, the Company performed its annual test of goodwill impairment in the fourth quarter of
2010 and 2009. In the first step of each year’s impairment test, the estimated fair value of both the
IHOP and Applebee’s franchising units exceeded their respective carrying values and the Company
concluded there was no impairment of goodwill.
During the twelve months ended December 31, 2008, there were several adjustments impacting
goodwill. A significant portion of the fair value that had been assigned to property and equipment in
the preliminary purchase price allocation was related to 510 Applebee’s company-operated restaurants.
In the preliminary purchase price allocation, the Company used assumptions as to rental data,
capitalization rates and obsolescence factors such as profitability, years in operation and lease holding
period. The assumptions used in the preliminary purchase price allocation were based on per-restaurant
averages that were applied to the entire portfolio of properties. Subsequently, the Company utilized
these same assumptions but with data specific to each individual restaurant and estimated a larger
amount of obsolescence. As a result, the fair value of property and equipment from the preliminary
purchase price valuation was revised downwards by approximately $133 million. Additionally, the data
used to estimate the capitalization rate in the preliminary allocation was based in part on industry data,
the reporting of which lagged the actual timing by several months. Once data on capitalization rates
being utilized in late November 2007 became available, the Company updated the capitalization rate
assumptions accordingly. As a result of this additional information on capitalization rates the estimated
fair value of property and equipment was revised downwards approximately $14 million. The
corresponding offset to these revisions was an increase to goodwill of $91.5 million, net of deferred
taxes, recorded in 2008.
After the revisions to the estimated purchase price allocation, the goodwill arising from the
acquisition of Applebee’s totaled $811.5 million, of which $124.8 million was assigned to Applebee’s
company-operated restaurant reporting unit (the ‘‘Company unit’’) and $686.7 million to Applebee’s
franchise reporting unit (the ‘‘franchise unit’’). Consistent with the Company’s intent to franchise the
significant majority of the company-operated Applebee’s restaurants acquired on November 29, 2007,
the Company determined the fair value of the Company unit for purposes of assigning goodwill to be
the estimated sales value of the restaurants, the value that a market participant would have paid to
purchase the restaurants on the day following the acquisition. The fair value of the Company unit was
based on a multiple of approximately six times the operating cash flow for the trailing twelve months of
the company unit. This multiple was supported by actual refranchising transactions negotiated within a
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