IHOP 2015 Annual Report Download - page 67

47
Expiration By Period
Commitments 1 Year 2 - 3 Years 4 - 5 Years More than
5 Years Total
(In millions)
Lease guarantees(3) ...................................................... $ 20.1 $ 38.1 $ 33.9 $ 305.9 $ 398.0
Letters of credit(4) ........................................................ 6.3 — — — 6.3
Food purchases(5)......................................................... 16.3 — — — 16.3
Total............................................................................. $ 42.7 $ 38.1 $ 33.9 $ 305.9 $ 420.6
(3) This amount represents the maximum potential liability for future payment guarantees under leases that have been assigned to third-party buyers of Applebee's
company-operated restaurants and expire at the end of the respective lease terms, which range from 2016 through 2048. See Note 10 of Notes to Consolidated
Financial Statements.
(4) Primarily used to satisfy insurance-related collateral requirements. These letters of credit expire annually, but are typically renewed in the same amount each
year unless collateral requirements change.
(5) In some instances, IHOP and Applebee's may be required to guarantee their purchase of any remaining inventory of certain food and other items purchased by
CSCS.
Critical Accounting Policies and Estimates
Our significant accounting policies are comprehensively described in Note 2 of Notes to the Consolidated Financial
Statements. We believe the accounting policies discussed below are particularly important to the understanding of our
consolidated financial statements and require us to make significant judgments in the preparation of those consolidated
financial statements. In exercising those judgments, we make estimates and assumptions that affect the carrying values of assets
and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses in the reporting
periods covered by the financial statements. On an ongoing basis, we evaluate our estimates based on historical experience,
current conditions and various other assumptions that we believe to be reasonable under the circumstances. We adjust such
estimates and assumptions when facts and circumstances dictate. Accounting assumptions and estimates are inherently
uncertain and actual results may differ materially from our estimates. Changes in estimates and judgments could significantly
affect our results of operations, financial condition and cash flow in the future.
Revenue Recognition
We record revenue 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 our 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 we
have 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.
We record a liability in the period in which a gift card is sold. We recognize 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. We recognize revenue and related administrative costs when gift cards are redeemed at company-operated restaurants.
When gift cards are redeemed at a franchisee-operated restaurant, the revenue and related administrative costs are recognized
by the franchisee. We recognize 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.