Wendy's 2008 Annual Report Download - page 107

Advertising Costs
The Company incurs various advertising costs, including contributions to certain advertising cooperatives
based upon a percentage of net sales by Company-owned restaurants. The Company accounts for contributions
made by the Company-owned restaurants to advertising cooperatives as an expense the first time the related
advertising takes place. All advertising costs are expensed as incurred with the exception of media development
costs that are expensed beginning in the month that the advertisement is first communicated. These amounts
are included in the “Cost of sales” expenses in the accompanying Consolidated Statements of Operations.
See Note 29 for further information regarding Advertising costs.
Self-Insurance
We are self-insured for most domestic workers’ compensation, health care claims, general liability and
automotive liability losses. We provide for our estimated cost to settle both known claims and claims incurred
but not yet reported. Liabilities associated with these claims are estimated, in part, by considering the
frequency and severity of historical claims, both specific to us as well as industry-wide loss experience, and
other actuarial assumptions. We determine casualty insurance obligations with the assistance of actuarial firms.
Since there are many estimates and assumptions involved in recording insurance liabilities, and in the case of
workers’ compensation, a significant period of time before ultimate resolution of claims, differences between
actual future events and prior estimates and assumptions could result in adjustments to these liabilities.
Leases
We operate restaurants that are located on sites owned by us and sites leased by us from third parties.
At inception, each lease is evaluated to determine whether the lease will be accounted for as an operating or
capital lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13,
Accounting for Leases (“SFAS 13”) and other related authoritative guidance under GAAP. When determining
the lease term we include option periods for which failure to renew the lease imposes an economic detriment.
The primary penalty to which we are subject is the economic detriment associated with the existence of
leasehold improvements which might be impaired if we choose not to exercise the available renewal options.
For operating leases, minimum lease payments, including minimum scheduled rent increases, are
recognized as rent expense on a straight line basis (“Straight-Line Rent”) over the applicable lease terms. Lease
terms are generally for 20 years and, in most cases, provide for rent escalations and renewal options. The term
used for Straight-Line Rent expense is calculated from the date we obtain possession of the leased premises
through the expected lease termination date at lease inception. We expense rent from possession date to the
restaurant opening date, in accordance with FASB Staff Position No. 13-1, “Accounting for Rental Costs
Incurred during a Construction Period” (“FSP 13-1”).
There is a period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that
generally begins on the possession date and ends on the rent commencement date. During the Rent Holiday
period, no cash rent payments are typically due under the terms of the lease, however, expense is recorded for
that period on a straight line basis consistent with the Straight-Line Rent policy.
For leases that contain rent escalations, we record the rent payable during the lease term, as determined
above, on the straight-line basis over the term of the lease (including the rent holiday period beginning upon
our possession of the premises), and record the excess of the Straight-Line Rent over the minimum rents paid
and the as a deferred lease liability included in “Other liabilities” in our Consolidated Balance Sheets. Certain
leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental
payments based upon restaurant sales volume. Contingent rent is expensed each period as the liability is
incurred.
Favorable and unfavorable lease amounts are recorded as components of “Other intangible assets” and
“Other liabilities”, respectively, when we purchase restaurants (see Note 3) and are amortized to “Cost of
99
Wendy’s/Arby’s Group, Inc. and Subsidiaries
(Formerly Triarc Companies, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)