Red Lobster 2012 Annual Report Download - page 47

Notes to Consolidated Financial Statements
Darden
Darden Restaurants, Inc. 2012 Annual Report 43
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 workers’ compensation and general liability claims that exceed
$0.5 million. Accrued liabilities have been recorded based on our estimates of the
anticipated ultimate costs to settle all claims, both reported and not yet reported.
REVENUE RECOGNITION
Sales, as presented in our consolidated statements of earnings, represents food
and beverage product sold and is presented net of discounts, coupons, employee
meals and complimentary meals and gift cards. Revenue from restaurant sales
is recognized when food and beverage products are sold. Sales taxes collected
from customers and remitted to governmental authorities are presented on a net
basis within sales on our consolidated statements of earnings.
Revenues from the sales of franchises are recognized as income when
substantially all of our material obligations under the franchise agreement have
been performed. Continuing royalties, which are a percentage of net sales of
franchised restaurants, are accrued as income when earned.
UNEARNED REVENUES
Unearned revenues represent our liability for gift cards that have been sold but
not yet redeemed. We recognize sales from our gift cards when the gift card is
redeemed by the customer. Although there are no expiration dates or dormancy
fees for our gift cards, based on our analysis of our historical gift card redemption
patterns, we can reasonably estimate the amount of gift cards for which
redemption is remote, which is referred to as “breakage”. We recognize breakage
within sales for unused gift card amounts in proportion to actual gift card
redemptions, which is also referred to as the “redemption recognition” method.
The estimated value of gift cards expected to remain unused is recognized over
the expected period of redemption as the remaining gift card values are redeemed,
generally over a period of 10 years. Utilizing this method, we estimate both the
amount of breakage and the time period of redemption. If actual redemption pat-
terns vary from our estimates, actual gift card breakage income may differ from
the amounts recorded. We update our estimates of our redemption period and
our breakage rate periodically and apply that rate to gift card redemptions.
FOOD AND BEVERAGE COSTS
Food and beverage costs include inventory, warehousing, related purchasing and
distribution costs and gains and losses on certain commodity derivative contracts.
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.
Advance payments are made by the vendors based on estimates of volume to be
purchased from the vendors and the terms of the agreement. As we make purchases
from the vendors each period, we recognize the pro rata portion of allowances
earned as a reduction of food and beverage costs for that period. Differences
between estimated and actual purchases are settled in accordance with the
terms of the agreements. 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
current liabilities.
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. Interest recognized on reserves
for uncertain tax positions is included in interest, net in our consolidated state-
ments of earnings. A corresponding liability for accrued interest is included as a
component of other current liabilities in our consolidated balance sheets. Penalties,
when incurred, are recognized in selling, general and administrative expenses.
ASC Topic 740, Income Taxes, requires that a position taken or expected to be
taken in a tax return be recognized (or derecognized) in the financial statements
when it is more likely than not (i.e., a likelihood of more than 50 percent) that the
position would be sustained upon examination by tax authorities. A recognized tax
position is then measured at the largest amount of benefit that is greater than
50฀percent฀likely฀of฀being฀realized฀upon฀ultimate฀settlement.฀See฀Note฀16฀–฀Income฀
Taxes for additional information.
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 enter into derivative instruments for risk management purposes only,
including derivatives designated as hedging instruments as required by FASB ASC
Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We
use financial and commodities derivatives to manage interest rate, compensation,
commodities pricing and foreign currency exchange rate risks inherent in our
business operations. Our use of derivative instruments is currently limited to
interest฀rate฀hedges;฀equity฀forwards฀contracts;฀commodities฀futures฀and฀options฀
contracts and foreign currency forward contracts. These instruments are generally
structured as hedges of the variability of cash flows related to forecasted trans-
actions (cash flow hedges). However, we do at times enter into instruments
designated as fair value hedges to reduce our exposure to changes in fair value
of the related hedged item. We do not enter into derivative instruments for trading
or speculative purposes, where changes in the cash flows or fair value of the
derivative are not expected to offset changes in cash flows or fair value of the
hedged item. However, we have entered into equity forwards to economically
hedge changes in the fair value of employee investments in our non-qualified
deferred compensation plan and certain commodity futures contracts to eco-
nomically hedge changes in the value of certain inventory purchases, for which
we have not applied hedge accounting. All derivatives are recognized on the
balance sheet at fair value. For those derivative instruments for which we intend
to elect hedge accounting, on the date the derivative contract is entered into, we
document all relationships between hedging instruments and hedged items, as