Red Lobster 2014 Annual Report Download - page 34

Notes to Consolidated Financial Statements
Darden
32 Darden Restaurants, Inc.
To the extent our derivatives are effective in offsetting the variability of
the hedged cash flows, and otherwise meet the cash flow hedge accounting
criteria required by Topic 815 of the FASB ASC, changes in the derivatives’
fair value are not included in current earnings but are included in accumulated
other comprehensive income (loss), net of tax. These changes in fair value
will be reclassified into earnings at the time of the forecasted transaction.
Ineffectiveness measured in the hedging relationship is recorded currently
in earnings in the period in which it occurs. To the extent our derivatives
are effective in mitigating changes in fair value, and otherwise meet the fair
value hedge accounting criteria required by Topic 815 of the FASB ASC,
gains and losses in the derivatives’ fair value are included in current earnings,
as are the gains and losses of the related hedged item. To the extent the
hedge accounting criteria are not met, the derivative contracts are utilized
as economic hedges and changes in the fair value of such contracts are
recorded currently in earnings in the period in which they occur. Cash flows
related to derivatives are included in operating activities. See Note 10 –
Derivative Instruments and Hedging Activities for additional information.
LEASES
For operating leases, we recognize rent expense on a straight-line basis over
the expected lease term, including cancelable option periods where failure
to exercise the options would result in an economic penalty to the Company.
Differences between amounts paid and amounts expensed are recorded
as deferred rent. Capital leases are recorded as an asset and an obligation at
an amount equal to the present value of the minimum lease payments during
the lease term. Within the provisions of certain of our leases, there are rent
holidays and escalations in payments over the base lease term, as well as
renewal periods. The effects of the holidays and escalations have been
reflected in rent expense on a straight-line basis over the expected lease
term, which includes cancelable option periods where failure to exercise
such options would result in an economic penalty to the Company. The lease
term commences on the date when we have the right to control the use of
the leased property, which is typically before rent payments are due under
the terms of the lease. Many of our leases have renewal periods totaling 5 to
20 years, exercisable at our option and require payment of property taxes,
insurance and maintenance costs in addition to the rent payments. The
consolidated financial statements reflect the same lease term for amortizing
leasehold improvements as we use to determine capital versus operating
lease classifications and in calculating straight-line rent expense for each
restaurant. Percentage rent expense is generally based on sales levels and
is accrued at the point in time we determine that it is probable that such
sales levels will be achieved. Amortization expense related to capital leases
is included in depreciation and amortization expense in our consolidated
statements of earnings. Landlord allowances are recorded based on con-
tractual terms and are included in accounts receivable, net and as a deferred
rent liability and amortized as a reduction of rent expense on a straight-line
basis over the expected lease term.
PRE-OPENING EXPENSES
Non-capital expenditures associated with opening new restaurants are
expensed as incurred.
ADVERTISING
Production costs of commercials are charged to operations in the fiscal
period the advertising is first aired. The costs of programming and other
advertising, promotion and marketing programs are charged to operations in
the fiscal period incurred. Advertising expense related to continuing operations,
included in selling, general and administrative expenses was as follows:
Fiscal Year
(in millions) 2014 2014 2012
Advertising expense $252.3 $241.1 $215.6
STOCK-BASED COMPENSATION
We recognize the cost of employee service received in exchange for awards
of equity instruments based on the grant date fair value of those awards.
We utilize the Black-Scholes option pricing model to estimate the fair value
of stock option awards. We recognize compensation expense on a straight-
line basis over the employee service period for awards granted. The dividend
yield has been estimated based upon our historical results and expectations
for changes in dividend rates. The expected volatility was determined using
historical stock prices. The risk-free interest rate was the rate available on
zero coupon U.S. government obligations with a term approximating the
expected life of each grant. The expected life was estimated based on the
exercise history of previous grants, taking into consideration the remaining
contractual period for outstanding awards. The weighted-average fair value
of non-qualified stock options and the related assumptions used in the
Black-Scholes model to record stock-based compensation are as follows:
Stock Options
Granted in Fiscal Year
2014 2013 2012
Weighted-average fair value $12.06 $12.22 $14.31
Dividend yield 4.4% 4.0% 3.5%
Expected volatility of stock 39.6% 39.7% 39.4%
Risk-free interest rate 1.9% 0.8% 2.1%
Expected option life (in years) 6.4 6.5 6.5
NET EARNINGS PER SHARE
Basic net earnings per share are computed by dividing net earnings by the
weighted-average number of common shares outstanding for the reporting
period. Diluted net earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
or converted into common stock. Outstanding stock options and restricted
stock granted by us represent the only dilutive effect reflected in diluted
weighted-average shares outstanding. These stock-based compensation
instruments do not impact the numerator of the diluted net earnings
per share computation.