Wendy's 2008 Annual Report Download - page 75

Should the actual cost of settling these matters, whether resulting from adverse judgments or otherwise,
differ from the reserves we have accrued, that difference will be reflected in our results of operations
when the matter is resolved or when our estimate of the cost changes.
•Accounting for 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 SFAS No. 13, Accounting for Leases, 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 FAS 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 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 as a deferred lease liability included in “Other liabilities.” 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, in addition
to the Straight-Line Rent.
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 sales”—both on a straight-line basis over the remaining term of the leases. Upon early termination of
a lease, the favorable or unfavorable lease balance associated with the lease is recognized as a loss or gain,
respectively, in our results of operations.
Management, with the assistance of a valuation firm, makes certain estimates and assumptions
regarding each new lease agreement, lease renewal, and lease amendment, including, but not limited to
property values, property lives, discount rates, and probable term, all of which can impact (i) the
classification and accounting for a lease as capital or operating, (ii) the rent holiday and/or escalations in
payment that are taken into consideration when calculating straight-line rent and (iii) the term over
which leasehold improvements for each restaurant are amortized. These estimates and assumptions may
produce materially different amounts of depreciation and amortization, interest and rent expense that
would be reported if different assumed lease terms were used.
Inflation and Changing Prices
We believe that inflation did not have a significant effect on our consolidated results of operations during
the reporting periods since inflation rates generally remained at relatively low levels.
Seasonality
Our restaurant operations are moderately impacted by seasonality. Wendy’s restaurant revenues are
normally higher during the summer months than during the winter months, and Arby’s restaurant revenues are
somewhat lower in our first quarter. Because our businesses are moderately seasonal, results for any future
67