Red Lobster 2016 Annual Report Download - page 35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DARDEN
DARDEN RESTAURANTS, INC. • 2016 ANNUAL REPORT 31
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 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. Liquor licenses are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Annual liquor license renewal fees are expensed over the
renewal term.
GOODWILL AND TRADEMARKS
We review our goodwill and trademarks for impairment annually, as of the
first day of our fourth fiscal quarter or more frequently if indicators of impair-
ment exist. Goodwill and trademarks are not subject to amortization and
have been assigned to reporting units for purposes of impairment testing.
The reporting units are our restaurant brands. Our goodwill and trademark
balances are allocated as follows:
Goodwill Trademarks
May 29, May 31, May 29, May 31,
(in millions) 2016 2015 2016 2015
Olive Garden (1) $ 30.2 $ 30.2 $ — $ —
LongHorn Steakhouse 49.3 49.3 307.8 307.8
The Capital Grille 401.6 401.7 147.0 147.0
Yard House 369.2 369.2 109.3 109.3
Eddie V’s 22.0 22.0 10.5 10.5
Total $872.3 $872.4 $574.6 $574.6
(1) Goodwill related to Olive Garden is associated with the RARE Hospitality International, Inc.
(RARE) acquisition and the estimated value of the direct benefits derived by Olive Garden
as a result of the RARE acquisition.
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 oper-
ating performance. The multiples are derived from comparable publicly
traded companies with similar operating and investment characteristics of
the reporting units. 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.
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 esti-
mated 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 for any of our brands.
The fair value of trademarks is 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 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, The Capital Grille, Eddie V’s and Yard House.
We evaluate the useful lives of our other intangible assets, to determine
if they are definite or indefinite-lived. A determination on useful life requires
significant judgments and assumptions regarding the future effects of obso-
lescence, 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.