IHOP 2014 Annual Report Download - page 87

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 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 a 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 as determined in accordance with U.S. GAAP governing fair value measurements. The primary method of estimating
fair value is based on a discounted cash flow analysis. 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.
On a regular (at a minimum, semi-annual) 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 12, Closure and
Impairment 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. The Company's
identifiable intangible assets are comprised primarily of the Applebee's tradename and Applebee's franchise agreements.
Identifiable intangible assets with finite lives (franchise agreements, recipes and menus) 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 (primarily the Applebee's tradename) 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 was allocated to three reporting units, the Applebee's company-operated restaurants unit (“Applebee's company
unit”), the Applebee's franchised restaurants unit (“Applebee's franchise unit”) and the IHOP franchised restaurants unit
(“IHOP 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 performs a quantitative test for impairment of the goodwill of the Applebee's franchise unit and the
tradename of the Applebee's company and franchise units as of October 31 of each year. The goodwill of the IHOP franchise
unit is assessed qualitatively as of December 31 of each year. In addition to the annual test of impairment, goodwill and
indefinite life intangible assets are 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 annual quantitative test 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 flow model include future trends in sales, operating expenses, overhead expenses, 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. The first step of the quantitative impairment test compares the fair value of each of the reporting units
to their carrying value. If the fair value is in excess of the carrying value, no impairment exists. If the first step does indicate
impairment, a second step must take place. Under the second step, 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