Red Lobster 2010 Annual Report Download - page 46

CAPITALIZED SOFTWARE COSTS AND
OTHER DEFINITE-LIVED INTANGIBLES
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 as of May 30, 2010 and May 31, 2009,
amounted to $72.9 million and $65.5 million, respectively. Accumulated
amortization as of May 30, 2010 and May 31, 2009, amounted to $49.3
million and $42.8 million, respectively. Amortization expense associated with
capitalized software amounted to $7.3 million, $8.4 million and $7.6 million,
in fiscal 2010, 2009 and 2008, respectively, and is included in depreciation
and amortization in our accompanying consolidated statements of earnings.
We also have definite-lived intangible assets related to the value of
above- and below-market leases, which were acquired as part of the RARE
acquisition. As of May 30, 2010 and May 31, 2009, we had $18.9 million,
net of accumulated amortization of $6.4 million, and $21.5 million, net of
accumulated amortization of $3.8 million, respectively, of below-market leases,
which are included in other assets on our consolidated balance sheets. As of
May 30, 2010 and May 31, 2009, we had $7.1 million, net of accumulated
amortization of $1.3 million, and $7.6 million, net of accumulated amortization
of $0.8 million, respectively, of above-market leases, which are included in
other liabilities on our consolidated balance sheets. As of May 30, 2010 and
May 31, 2009, we had other definite-lived intangibles of $5.5 million, net of
accumulated amortization of $5.1 million, and $5.8 million, net of accumulated
amortization of $4.8 million, respectively, which are included in other assets in
our consolidated balance sheet. Definite-lived intangibles are amortized on a
straight-line basis over estimated useful lives of one to 20 years. Amortization
expense related to below-market leases for fiscal 2010, 2009 and 2008 was
$2.6 million, $2.3 million and $1.5 million, respectively, and is included in
restaurant expenses as a component of rent expense on our consolidated
statements of earnings. Amortization related to above-market leases for
fiscal 2010, 2009 and 2008 was $0.5 million, $0.5 million and $0.4 million,
respectively, and is included in restaurant expenses as a component of rent
expense on our consolidated statements of earnings. Amortization of other
amortizable intangibles was $0.4 million, $1.5 million and $2.6 million in fiscal
2010, 2009 and 2008, respectively, and is included in depreciation and
amortization expenses in our consolidated statements of earnings. Amortization
of capitalized software and other definite-lived intangible assets will be
approximately $10.7 million annually for fiscal 2011 through 2015.
TRUST-OWNED LIFE INSURANCE
We have a trust that purchased life insurance policies covering certain 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 for each policy is
included in other assets while changes in cash surrender values 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 purchasing transferable liquor licenses through open markets in
jurisdictions with a limited number of authorized liquor licenses are capitalized
as indefinite-lived intangible assets and included in other assets. Annual
liquor license renewal fees are expensed over the renewal term.
GOODWILL AND OTHER INTANGIBLES
We review our goodwill and other indefinite-lived intangible assets, primarily
our trademarks, for impairment annually, as of the first day of our fourth fiscal
quarter or more frequently if indicators of impairment exist. Goodwill and other
indefinite-lived intangible assets not subject to amortization have been
assigned to reporting units for purposes of impairment testing. The reporting
units are our restaurant brands. At May 30, 2010 and May 31, 2009, we had
goodwill of $517.3 million and $518.7 million, respectively, and trademarks
of $454.0 million and $454.4 million, respectively. Of the carrying value of
our goodwill at May 30, 2010, $402.2 million and $49.9 million, respectively,
was allocated to The Capital Grille and LongHorn Steakhouse. At May 31, 2009,
$402.8 million and $50.7 million, respectively, was allocated to The Capital
Grille and LongHorn Steakhouse. Of the carrying value of our trademarks,
$307.0 million and $147.0 million was allocated to LongHorn Steakhouse
and The Capital Grille, respectively, at May 30, 2010 and May 31, 2009.
A significant amount of judgment is involved in determining if an indicator
of impairment has occurred. Such indicators may include, among others: a
significant฀decline฀in฀our฀expected฀future฀cash฀flows;฀a฀sustained,฀significant฀
decline฀in฀our฀stock฀price฀and฀market฀capitalization;฀a฀significant฀adverse฀
change฀in฀legal฀factors฀or฀in฀the฀business฀climate;฀unanticipated฀competition;฀
the฀testing฀for฀recoverability฀of฀a฀significant฀asset฀group฀within฀a฀reporting฀unit;฀
and slower growth rates. Any adverse change in these factors could have a
significant impact on the recoverability of these assets and could have a
material impact on our consolidated financial statements.
The goodwill impairment test involves a two-step process. The first step
is a comparison of each reporting unit’s fair value to its carrying value. We
estimate fair value using the best information available, including market
information and discounted cash flow projections (also referred to as the
income approach). The income approach uses a reporting unit’s projection
of estimated operating results and cash flows that is discounted using a
weighted-average cost of capital that reflects current market conditions.
The projection uses management’s best estimates of economic and market
conditions over the projected period including growth rates in sales, costs and
number of units, estimates of future expected changes in operating margins
and cash expenditures. Other significant estimates and assumptions include
terminal value growth rates, future estimates of capital expenditures and
changes in future working capital requirements. We validate our estimates
of fair value under the income approach by comparing the values to fair
value estimates using a market approach. A market approach estimates
fair value by applying cash flow and sales multiples to the reporting unit’s
operating performance. The multiples are derived from comparable publicly
traded companies with similar operating and investment characteristics of
the reporting units.
44 DARDEN RESTAURANTS, INC. | 2010 ANNUAL REPORT
Notes to Consolidated Financial Statements
Darden