IHOP 2012 Annual Report Download - page 89

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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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.
There were no impairments of goodwill or intangible assets recorded in 2012, 2011 or 2010.
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 interest income from the financing of franchise fees and equipment
leases, as well as sales of equipment associated with refranchised IHOP restaurants and a portion of franchise fees for restaurants
taken back from franchisees not allocated to IHOP intellectual property.
Revenues from franchised and area licensed restaurants include royalties, continuing rent and service fees and initial franchise
fees. Royalties are recognized in the period in which the sales are reported to have occurred. Continuing rent and fees are recognized
in the period earned. Initial franchise fees are recognized upon the opening of a restaurant, which is when the Company has
performed substantially all initial services required by the franchise agreement. Fees from development agreements are deferred
and recorded into income as restaurants under the development agreement are opened.
Sales by company-operated restaurants are recognized when food and beverage items are sold. Company restaurant sales are
reported net of sales taxes collected from guests that are remitted to the appropriate taxing authorities.
The Company records a liability in the period in which a gift card is sold. As gift cards are redeemed, this liability is reduced,
with revenue recognized on redemptions at company-operated restaurants. The Company recognizes gift card breakage income
on gift cards issued by Applebee's when the assessment of the likelihood of redemption of the gift card becomes remote. This
assessment is based upon Applebee's historical experience with gift card redemptions. The Company currently does not record
breakage income on gift cards issued by IHOP due to the limited historical experience with IHOP gift card redemptions because
the IHOP gift card program has not been in existence as long as the Applebee's program. The Company recorded gift card breakage
revenue of $1.3 million, $2.1 million and $2.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Allowance for Credit Losses
The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in existing
receivables; however, changes in circumstances relating to receivables may result in additional allowances in the future. The
Company determines the allowance based on historical experience, current payment patterns, future obligations and the Company's
assessment of the ability to pay outstanding balances. The primary indicator of credit quality is delinquency, which is considered
to be a receivable balance greater than 90 days past due. The Company continually reviews the allowance for doubtful accounts.
Past due balances and future obligations are reviewed individually for collectability. Account balances are charged against the
allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.
Leases
The Company leases more than half of all IHOP restaurants. The restaurants are subleased to IHOP franchisees or, in a few
instances, are operated by the Company. The Company's IHOP leases generally provide for an initial term of 15 to 25 years, with
most having one or more five-year renewal options at the Company's option. In addition, the Company leases a majority of its
Applebee's company-operated restaurants. Franchisees are responsible for financing their properties. The Applebee's company-
operated leases generally have an initial term of 10 to 20 years, with renewal terms of five to 20 years, and provide for a fixed
rental plus, in certain instances, percentage rentals based on gross sales. The rental payments or receipts on leases that meet the
operating lease criteria are recorded as rental expense or rental income. Rental expense and rental income for these operating
leases are recognized on the straight-line basis over the original terms of the leases. The difference between straight-line rent
expense or income and actual amounts paid or received represents deferred rent and is included in the consolidated balance sheets
as other assets or other liabilities, as appropriate.