Red Lobster 2012 Annual Report Download - page 46

Notes to Consolidated Financial Statements
Darden
42 Darden Restaurants, Inc. 2012 Annual Report
If the fair value of the reporting unit is higher than its carrying value, goodwill
is deemed not to be impaired, and no further testing is required. If the carrying
value of the reporting unit is higher than its fair value, there is an indication that
impairment may exist and the second step must be performed to measure the
amount of impairment loss. The amount of impairment is determined by comparing
the implied fair value of reporting unit goodwill to the carrying value of the goodwill
in the same manner as if the reporting unit was being acquired in a business
combination. Specifically, fair value is allocated to all of the assets and liabilities
of the reporting unit, including any unrecognized intangible assets, in a hypothetical
analysis that would calculate the implied fair value of goodwill. If the implied fair
value of goodwill is less than the recorded goodwill, we would record an impairment
loss for the difference.
Consistent with our accounting policy for goodwill and trademarks we
performed our annual impairment test of our goodwill and trademarks as of the first
day of our fiscal 2012 fourth quarter. As of the beginning of our fiscal fourth quarter,
we had seven reporting units: Red Lobster, Olive Garden, LongHorn Steakhouse,
The Capital Grille, Bahama Breeze, Seasons 52 and Eddie V’s. Two of these
reporting units, LongHorn Steakhouse and The Capital Grille, have a significant
amount of goodwill. As we finalized the purchase price allocation for Eddie V’s
during our fourth fiscal quarter of 2012 and no indicators of impairment were
identified, we excluded the goodwill allocated to Eddie V’s from our annual
impairment test. As part of our process for performing the step one impairment
test of goodwill, we estimated the fair value of our reporting units utilizing the
income and market approaches described above to derive an enterprise value of
the Company. We reconciled the enterprise value to our overall estimated market
capitalization. The estimated market capitalization considers recent trends in our
market capitalization and an expected control premium, based on comparable
recent and historical transactions. Based on the results of the step one impairment
test, no impairment of goodwill was indicated.
The fair value of trademarks are estimated and compared to the carrying
value. We estimate the fair value of trademarks using the relief-from-royalty
method, which requires assumptions related to projected sales from our annual
long-range฀plan;฀assumed฀royalty฀rates฀that฀could฀be฀payable฀if฀we฀did฀not฀own฀
the฀trademarks;฀and฀a฀discount฀rate.฀We฀recognize฀an฀impairment฀loss฀when฀the฀
estimated fair value of the trademarks is less than its carrying value. We completed
our impairment test and concluded as of the date of the test, there was no
impairment of the trademarks for LongHorn Steakhouse and The Capital Grille.
We determined that there was no goodwill or trademark impairment as of the
first day of our fourth fiscal quarter and no additional indicators of impairment
were identified through the end of our fourth fiscal quarter that would require us
to test further for impairment. However, declines in our market capitalization
(reflected in our stock price) as well as in the market capitalization of other
companies in the restaurant industry, declines in sales at our restaurants, and
significant adverse changes in the operating environment for the restaurant
industry may result in future impairment.
Changes in circumstances, existing at the measurement date or at other
times in the future, or in the numerous estimates associated with management’s
judgments and assumptions made in assessing the fair value of our goodwill,
could result in an impairment loss of a portion or all of our goodwill or trademarks.
If we recorded an impairment loss, our financial position and results of operations
would be adversely affected and our leverage ratio for purposes of our credit
agreement would increase. A leverage ratio exceeding the maximum permitted
under our credit agreement would be a default under our credit agreement.
At May 27, 2012, a write-down of goodwill, other indefinite-lived intangible
assets, or any other assets in excess of approximately $850.0 million would have
been required to cause our leverage ratio to exceed the permitted maximum.
As our leverage ratio is determined on a quarterly basis and due to the seasonal
nature of our business, a lesser amount of impairment in future quarters could
cause our leverage ratio to exceed the permitted maximum.
We evaluate the useful lives of our other intangible assets, primarily
intangible assets associated with the RARE acquisition, to determine if they are
definite or indefinite-lived. A determination on useful life requires significant
judgments and assumptions regarding the future effects of obsolescence, demand,
competition, other economic factors (such as the stability of the industry,
legislative action that results in an uncertain or changing regulatory environment,
and expected changes in distribution channels), the level of required maintenance
expenditures, and the expected lives of other related groups of assets.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Land, buildings and equipment and certain other assets, including definite-lived
intangible assets, are reviewed for impairment whenever events or changes in
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 recognized 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
within prepaid expenses and other current assets in our consolidated balance
sheets when certain criteria are met. These criteria include the requirement that
the likelihood of disposing of these assets within one year is probable. Assets not
meeting the “held for sale” criteria remain in land, buildings and equipment until
their disposal is probable within one year.
We account for exit or disposal activities, including restaurant closures, in
accordance with Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 420, Exit or Disposal Cost Obligations. Such
costs include the cost of disposing of the assets as well as other facility-related
expenses from previously closed restaurants. These costs are generally expensed
as incurred. Additionally, at the date we cease using a property under an operating
lease, we record a liability for the net present value of any remaining lease obliga-
tions, net of estimated sublease income. Any subsequent adjustments to that liability
as a result of lease termination or changes in estimates of sublease income are
recorded in the period incurred. Upon disposal of the assets, primarily land,
associated with a closed restaurant, any gain or loss is recorded in the same caption
within our consolidated statements of earnings as the original impairment.