IHOP 2011 Annual Report Download - page 86

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
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Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets, which include amortizable intangible and tangible assets,
in accordance with U.S. GAAP. The Company tests impairment using historical cash flows and other relevant facts and
circumstances as the primary basis for estimates of future cash flows. The Company considers factors such as the number of years
the restaurant has been in operation, 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 a restaurant's assets is measured by comparing the assets' carrying value to the undiscounted future 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, this may be an indicator of impairment. If it is
decided that there has been an impairment, the carrying amount of the asset is written down to the estimated fair value. The fair
value is determined in accordance with U.S. GAAP governing fair value measurements. The primary method of estimating fair
value is by discounting the future cash flows based on the Company's cost of capital. A loss resulting from impairment is recognized
as a charge against operations.
The Company may decide to close certain company-operated restaurants. Typically such decisions are based on operating
performance or strategic considerations. In these instances, the Company reserves, or writes off, the full carrying value of these
restaurants as impaired.
Periodically, the Company will reacquire a previously franchised restaurant. At the time of reacquisition, the franchise will
be recorded at the lower of (1) the sum of the franchise receivables and costs of reacquisition, or (2) the estimated net realizable
value. The net realizable value of a reacquired franchise is based on the Company's average five-year historical franchise resale
value. An impairment loss will be recognized equal to the amount by which the reacquisition value exceeds the historical resale
value.
On a quarterly basis, the Company assesses whether events or changes in circumstances have occurred that potentially
indicate the carrying value of long-lived assets may not be recoverable. See Note 17, Impairment and Closure Charges.
Goodwill and Intangible Assets
Goodwill is recorded when the aggregate purchase price of an acquisition exceeds the estimated fair value of the net identified
tangible and intangible assets acquired. Intangible assets resulting from the acquisition are accounted for using the purchase method
of accounting and are estimated by management based on the fair value of the assets received. Identifiable intangible assets are
comprised primarily of trademarks, tradenames and franchise agreements. Identifiable intangible assets with finite lives are
amortized over the period of estimated benefit using the straight-line method and estimated useful lives. Goodwill and intangible
assets considered to have an indefinite life are not subject to amortization. The determination of indefinite life is subject to
reassessment if changes in facts and circumstances indicate the period of benefit has become finite.
Goodwill has been allocated to three reporting units, the IHOP franchised restaurants unit ("IHOP franchise unit"), Applebee's
company-operated restaurants unit ("Applebee's company unit") and Applebee's franchised restaurants unit ("Applebee's franchise
unit") in accordance with U.S. GAAP. The significant majority of the Company's goodwill resulted from the November 29, 2007
acquisition of Applebee's and was allocated between the two Applebee's units. The goodwill allocated to the Applebee's company
unit was fully impaired in 2008. The Company tests goodwill and other indefinite life intangible assets for impairment on an annual
basis in the fourth quarter. The impairment test of goodwill of the Applebee's franchise unit is performed as of October 31 of each
year. The impairment test of the goodwill of the IHOP franchise unit is performed as of December 31 of each year. In addition to
the annual test of impairment, goodwill 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 of 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 refranchising
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