IHOP 2014 Annual Report Download - page 88

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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over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill, to which the carrying value of the
goodwill must be adjusted.
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 2014, 2013 or 2012.
Revenue Recognition
The Company's revenues are recorded in four categories: franchise operations, company restaurant operations, rental
operations and financing operations.
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 primarily of interest income from the financing of franchise
fees and equipment leases, as well as sales of equipment associated with refranchised IHOP restaurants.
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 been earned, which occurs at the
franchisees' point of sale. 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 and recognizes costs associated with our
administration of the gift card programs as prepaid assets when the costs are incurred. As gift cards are redeemed, the liability
and prepaid asset are reduced. When gift cards are redeemed at a franchisee-operated restaurant, the revenue and related
administrative costs are recognized by the franchisee. The Company recognizes revenue and related administrative costs when
gift cards are redeemed at company-operated restaurants. The Company recognizes gift card breakage income on gift cards
when the assessment of the likelihood of redemption of the gift card becomes remote. This assessment is based upon
Applebee's and IHOP's individual historical experience with gift card redemptions in their own program. The Company
recorded gift card breakage revenue of $0.1 million, $0.2 million and $1.3 million for the years ended December 31, 2014,
2013 and 2012, respectively. The decline from 2012 to 2013 was due to the decrease in the number of Applebee's company-
operated restaurants.
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 franchisee's or area licensee's 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 is the lessor or sub-lessor of the properties on which 709 IHOP restaurants and one Applebee's restaurant are
located. The restaurants are subleased to 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. 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