Wendy's 2011 Annual Report Download - page 59

In 2012, Wendy’s Restaurants (1) provided a guarantee to a lender to the Japan joint venture for which our
joint venture partner has agreed to reimburse and otherwise indemnify us for his 51% share of the guarantee and
(2) has agreed to reimburse and otherwise indemnify our joint venture partner for our 49% share of the guarantee by
our joint venture partner of a line of credit granted by a different lender to the Japan joint venture to fund working
capital requirements. Our portion of these contingent obligations totals approximately $2.9 million (¥220.8 million)
based upon current rates of exchange. The fair value of our guarantees is immaterial. The Companies anticipate that
additional guarantees of up to $5.0 million may be necessary in 2012.
Inflation and Changing Prices
We believe that general inflation did not have a significant effect on our consolidated results of operations,
except as mentioned below for certain commodities, during the reporting periods. We manage any inflationary costs
and commodity price increases through selective menu price increases. Delays in implementing such menu price
increases and competitive pressures may limit our ability to recover such cost increases in the future. Inherent
volatility experienced in certain commodity markets, such as those for beef, chicken, corn and wheat had a significant
effect on our results of operations in 2011 and may have an adverse effect on us in the future. The extent of any
impact will depend on our ability and timing to increase food prices.
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. Because our business is moderately seasonal,
results for any future quarter will not necessarily be indicative of the results that may be achieved for any other quarter
or for the full fiscal year.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions in applying our critical
accounting policies that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses
during the reporting period. Our estimates and assumptions concern, among other things, goodwill impairment,
impairment of long-lived assets, realizability of deferred tax assets, Federal and state income tax uncertainties, and
legal and environmental reserves. We evaluate those estimates and assumptions on an ongoing basis based on
historical experience and on various other factors which we believe are reasonable under the circumstances.
We believe that the following represent our more critical estimates and assumptions used in the preparation of
our consolidated financial statements:
• Goodwill impairment:
For goodwill purposes, Wendy’s includes two reporting units comprised of its (1) North America (defined
as the United States of America and Canada) company-owned and franchise restaurants and
(2) international franchise restaurants. As of January 1, 2012, substantially all Wendy’s goodwill of $870.4
million was associated with its North America restaurants.
We test goodwill for impairment annually, or more frequently if events or changes in circumstances
indicate that the asset may be impaired. In the fourth quarter of 2011, we adopted a new accounting
pronouncement related to our goodwill impairment analysis, which permits a company to make an
assessment of whether it is more likely than not that a reporting unit’s fair value is greater than its carrying
amount as a basis for determining whether it is necessary to compare the fair value of each reporting unit,
using both discounted cash flows and market multiples based on earnings, to the carrying value to
determine if there is an indication that a potential impairment may exist.
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