IHOP 2015 Annual Report Download - page 84

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DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
64
Treasury Stock
The Company may from time to time utilize treasury stock when vested stock options are exercised, when restricted stock
awards are granted and when restricted stock units settle in stock upon vesting. The cost of treasury stock re-issued is
determined using the first-in, first-out method.
Reporting Segments
The Company identifies its reporting segments based on the organizational units used by management to monitor
performance and make operating decisions. These reporting segments are as follows: franchise operations (an aggregation of
Applebee's and IHOP franchise operations) and rental operations. The Company has IHOP company-operated restaurant
operations and financing operations, but neither of these operating segments exceeds 10% of consolidated revenues, income
before income tax provision or total assets.
Franchise Segment
As of December 31, 2015, the franchise operations segment consisted of 2,033 restaurants operated by Applebee's
franchisees in the United States, two United States territories and 15 countries outside of the United States and 1,672
restaurants operated by IHOP franchisees and area licensees in the United States, three United States territories and nine
countries outside of the United States. Franchise operations revenue consists primarily of franchise royalty revenues, sales of
proprietary products (primarily IHOP pancake and waffle dry-mixes) and franchise fees. Additionally, franchise fees designated
for IHOP's national advertising fund and local marketing and advertising cooperatives are recognized as revenue and expense
of franchise operations; however, due to different contractual terms in Applebee's marketing agreements, Applebee's national
advertising fund activity constitutes agency transactions and therefore is not recognized as franchise revenue and expense.
Franchise operations expenses include IHOP advertising expense, the cost of proprietary products, pre-opening training
expenses and other franchise-related costs.
Rental Segment
Rental operations revenue includes revenue from operating leases and interest income from direct financing leases. Rental
operations expenses are costs of operating leases and interest expense of capital leases on franchisee-operated restaurants. The
rental operations revenue and expenses are primarily generated by IHOP. Applebee's has an insignificant amount of rental
activity related to one property that was retained after refranchising a company-operated restaurant.
Company Segment
As of December 31, 2015, the company restaurant operations segment consisted of 10 IHOP company-operated restaurants
and one IHOP restaurant reacquired from a franchisee and operated by the Company on a temporary basis until refranchised.
We also operated 23 Applebee's restaurants until they were refranchised in July 2015. All company-operated restaurants were
located in the United States. Company restaurant sales are retail sales at company-operated restaurants. Company restaurant
expenses are operating expenses at company-operated restaurants and include food, beverage, labor, benefits, utilities, rent and
other operating costs.
Financing Segment
Financing operations revenue primarily consists of interest income from the financing of IHOP franchise fees and
equipment leases, as well as sales of equipment associated with refranchised IHOP restaurants. Financing expenses are the cost
of restaurant equipment.
Recently Adopted Accounting Standards
In April 2014, the Financial Accounting Standards Board (“FASB”) issued an amendment to the existing guidance on the
reporting of discontinued operations. The amendment changed the criteria for the reporting of discontinued operations such that
only disposals resulting in a strategic shift that will have a major effect on an entity's operations and financial results will be
reported as discontinued operations. The amendment also removed the requirement that an entity not have any significant
continuing involvement in the operations of the component after disposal to qualify for reporting of the disposal as a
discontinued operation. The Company adopted the amendment as of January 1, 2015 and adoption did not have an impact on
the Company’s consolidated financial statements.