Red Lobster 2016 Annual Report Download - page 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DARDEN
32
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, sales prices of comparable assets
or discounted future net cash flows expected to be generated by the 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 sale on 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 obligations, 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.
INSURANCE ACCRUALS
Through the use of insurance program deductibles and self-insurance,
we retain a significant portion of expected losses under our workers’ com-
pensation, certain employee medical and general liability programs. 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. 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 in our consolidated statements of earnings.
Revenue from the sale of franchises is 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. Revenue
from the sale of consumer packaged goods includes ongoing royalty fees
based on a percentage of licensed retail product sales and is recognized
upon the sale of product by our licensed manufacturers to retail outlets.
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 patterns 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 agree-
ments. Vendor agreements are generally for a period of one year or more
and payments received are initially recorded as long-term liabilities. Amounts
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 statements of earnings. A corresponding
liability for accrued interest is included as a component of other current
liabilities on our consolidated balance sheets. Penalties, when incurred,
are recognized in 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 13 for additional information.