Red Lobster 2005 Annual Report Download - page 34

NOTE 1
Summary of Significant Accounting Policies
Operations and Principles of Consolidation
The consolidated financial statements include the opera-
tions of Darden Restaurants, Inc. and its wholly owned sub-
sidiaries. We own and operate various restaurant concepts
located in the United States and Canada, with no franchis-
ing. We also license 37 restaurants in Japan. All significant
intercompany balances and transactions have been elimi-
nated in consolidation.
Fiscal Year
Our fiscal year ends on the last Sunday in May. Fiscal
2005 and 2003 both consisted of 52 weeks of operation.
Fiscal 2004 consisted of 53 weeks of operation.
Cash Equivalents
Cash equivalents include highly liquid investments such
as U.S. treasury bills, taxable municipal bonds and money
market funds that have a maturity of three months or less.
Amounts receivable from credit card companies are also
considered cash equivalents because they are both short-
term and highly liquid in nature and are typically converted
to cash within three days of the sales transaction.
Inventories
Inventories consist of food and beverages, and are
valued at the lower of weighted-average cost or market.
Land, Buildings and Equipment
Land, buildings and equipment are recorded at cost less
accumulated depreciation. Repair and maintenance costs
incurred to maintain the appearance and functionality of the
land, buildings and equipment that do not extend its useful
life or that are less than $1 are expensed as incurred. Building
components are depreciated over estimated useful lives
ranging from seven to 40 years using the straight-line method.
Leasehold improvements, which are reflected on our consoli-
dated balance sheets as a component of buildings, are
amortized over the lesser of the expected lease term, includ-
ing cancelable option periods, or the estimated useful lives of
the related assets using the straight-line method. Equipment
is depreciated over estimated useful lives ranging from two
to ten years also using the straight-line method. Accelerated
depreciation methods are generally used for income tax
purposes. Depreciation and amortization expense associ-
ated with buildings and equipment amounted to $206,552,
$203,349 and $184,963, in fiscal 2005, 2004 and 2003,
respectively. In fiscal 2005, 2004 and 2003, we had losses
on disposal of land, buildings and equipment of $1,164, $104
and $2,456, respectively, which were included in selling,
general and administrative expenses.
Capitalized Software Costs
Capitalized software, which is a component of other
assets, is recorded at cost less accumulated amortization.
Capitalized software is amortized using the straight-line
method over estimated useful lives ranging from three to ten
years. The cost of capitalized software at May 29, 2005 and
May 30, 2004, amounted to $51,292 and $46,629, respec-
tively. Accumulated amortization as of May 29, 2005 and
May 30, 2004 amounted to $19,877 and $14,301, respec-
tively. Amortization expense associated with capitalized
software amounted to $6,667, $6,655 and $6,255, in fiscal
2005, 2004 and 2003, respectively.
Trust-Owned Life Insurance
In August 2001, we caused a trust that we previously had
established to purchase life insurance policies covering cer-
tain of our officers and other key employees (trust-owned life
insurance or TOLI). The trust is the owner and sole beneficiary
of the TOLI policies. The policies were purchased to offset a
portion of our obligations under our non-qualified deferred
compensation plan. The cash surrender value of the policies is
included in other assets while changes in cash surrender value
are included in selling, general and administrative expenses.
Liquor Licenses
The costs of obtaining non-transferable liquor licenses
that are directly issued by local government agencies for
nominal fees are expensed as incurred. The costs of pur-
chasing transferable liquor licenses through open markets
in jurisdictions with a limited number of authorized liquor
licenses are capitalized. Annual liquor license renewal fees
are expensed.
Impairment of Long-Lived Assets
Land, buildings and equipment and certain other assets,
including capitalized software costs and liquor licenses, are
reviewed for impairment whenever events or changes in
Notes to Consolidated Financial Statements
Financial Review 2005
(Dollar amounts in thousands, except per share data)
42 Darden Restaurants