IHOP 2015 Annual Report Download - page 68

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Goodwill and Intangibles
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 (franchise agreements, recipes, menus and favorable leaseholds) 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 has been 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 our 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.
We first perform a qualitative assessment 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. Qualitative factors considered include, but are not limited to, macro-economic
conditions, market and industry conditions, cost considerations, the competitive environment, share price fluctuations, overall
financial performance and results of past impairment tests. If necessary following the qualitative assessment, we perform a
quantitative impairment test. In addition to the annual test of impairment, goodwill and indefinite life intangible assets are
evaluated more frequently if we believe 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 our common stock.
In the process of a quantitative test of goodwill, if necessary, we primarily use 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 our 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 our 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 an 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 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. The fair value of all reporting units is then compared to the current market value of our common stock to
determine if the fair values estimated in the impairment testing process are reasonable in light of the current market value.
In the process of a quantitative test, if necessary, of the Applebee's tradename, we primarily use the relief of royalty
method under the 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.
Long-Lived Assets
We assess long-lived and intangible assets with finite lives for impairment when events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. We test impairment using historical cash flows and other
relevant facts and circumstances as the primary basis for our estimates of future cash flows. We consider factors such as the
number of years the restaurant has been operated by us, 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 the restaurant's assets is measured by comparing the assets' carrying value to the undiscounted
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, the carrying amount is written down to
the estimated fair value, and a loss resulting from impairment is recognized by a charge to earnings. This process requires the
use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we
may be required to record impairment charges for these assets.