Red Lobster 2005 Annual Report Download - page 35

circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying
amount of the assets to the future undiscounted net cash
flows expected to be generated by the assets. Identifiable
cash flows are measured at the lowest level for which they
are largely independent of the cash flows of other groups of
assets and liabilities, generally at the restaurant level. If such
assets are determined to be impaired, the impairment rec-
ognized is measured by the amount by which the carrying
amount of the assets exceeds their fair value. Fair value is
generally determined based on appraisals or sales prices of
comparable assets. Restaurant sites and certain other assets
to be disposed of are reported at the lower of their carrying
amount or fair value, less estimated costs to sell. Restaurant
sites and certain other assets to be disposed of are included
in assets held for disposal when certain criteria are met. These
criteria include the requirement that the likelihood of dispos-
ing of these assets within one year is probable. Assets
whose disposal is not probable within one year remain in
land, buildings and equipment until their disposal is proba-
ble within one year.
Insurance Accruals
Through the use of insurance program deductibles and
self-insurance, we retain a significant portion of expected
losses under our workers’ compensation, employee medical
and general liability programs. However, we carry insurance
for individual claims that generally exceed $250 for workers’
compensation and general liability claims. Accrued liabilities
have been recorded based on our estimates of the antici-
pated ultimate costs to settle all claims, both reported and
unreported.
Revenue Recognition
Revenue from restaurant sales is recognized when
food and beverage products are sold. Unearned revenues
represent our liability for gift cards and certificates that
have been sold but not yet redeemed and are recorded at
their expected redemption value. When the gift cards and
certificates are redeemed, we recognize restaurant sales
and reduce unearned revenues.
Food and Beverage Costs
Food and beverage costs include inventory, warehous-
ing and related purchasing and distribution costs. Vendor
allowances received in connection with the purchase of a
vendor’s products are recognized as a reduction of the related
food and beverage costs as earned. These allowances are
recognized as earned in accordance with the underlying
agreement with the vendor and completion of the earning
process. Vendor agreements are generally for a period of one
year or more and payments received are initially recorded
as long-term liabilities. Amounts which are expected to be
earned within one year are recorded as a current liability.
Income Taxes
We provide for federal and state income taxes currently
payable as well as for those deferred because of temporary
differences between reporting income and expenses for
financial statement purposes versus tax purposes. Federal
income tax credits are recorded as a reduction of income
taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings
in the period that includes the enactment date.
Income tax benefits credited to equity relate to tax
benefits associated with amounts that are deductible for
income tax purposes but do not affect earnings. These
benefits are principally generated from employee exercises
of non-qualified stock options and vesting of employee
restricted stock awards.
Derivative Instruments and Hedging Activities
We use financial and commodities derivatives to manage
interest rate, compensation and commodities pricing risks
inherent in our business operations. Our use of derivative
instruments is currently limited to interest rate hedges, equity
forwards contracts and commodities futures contracts. These
instruments are structured as hedges of forecasted transac-
tions or the variability of cash flows to be paid related to a
recognized asset or liability (cash flow hedges). No deriva-
tive instruments are entered into for trading or speculative
purposes. All derivatives are recognized on the balance sheet
at fair value. On the date the derivative contract is entered into,
we document all relationships between hedging instruments
Notes to Consolidated Financial Statements
Financial Review 2005
Darden Restaurants 43