Wendy's 2013 Annual Report Download - page 56

each reporting unit may vary depending on the risk inherent in the cash flow projections, as well as the risk
level that would be perceived by a market participant. A terminal value is included at the end of the
projection period used in our discounted cash flow analyses to reflect the remaining value that each
reporting unit is expected to generate. The terminal value represents the present value in the last year of the
projection period of all subsequent cash flows into perpetuity. The terminal value growth rate is a key
assumption used in determining the terminal value as it represents the annual growth of all subsequent
cash flows into perpetuity.
Under the market approach, we apply the guideline company method in estimating fair value. The
guideline company method makes use of market price data of corporations whose stock is actively traded
in a public market. The corporations we selected as guideline companies are engaged in a similar line of
business or are subject to similar financial and business risks, including the opportunity for growth. The
guideline company method of the market approach provides an indication of value by relating the equity
or invested capital (debt plus equity) of guideline companies to various measures of their earnings and cash
flow, then applying such multiples to the business being valued. The result of applying the guideline
company approach is adjusted based on the incremental value associated with a controlling interest in the
business. This “control premium” represents the amount a new controlling shareholder would pay for the
benefits resulting from synergies and other potential benefits derived from controlling the enterprise.
During the fourth quarter of 2013, we performed our annual goodwill impairment test. Step one of our
process determined that our international franchise restaurants reporting unit was impaired as its carrying
amount exceeded its fair value. The fair value of our international franchise reporting unit was based on
the income approach, which is determined based on the present value of the anticipated cash flows
associated with the reporting unit. The decline in the fair value of the international franchise restaurants
reporting unit resulted from lower than anticipated current and future operating results including lower
projected growth rates and profitability levels than previously anticipated. Step two of our process, resulted
in an impairment charge of $9.4 million which represents the total amount of goodwill recorded for our
international franchise restaurants reporting unit. We also concluded at that time that our remaining
goodwill, which relates to our North America company-owned and franchise restaurants reporting unit
was not impaired; the fair value of our North America reporting unit of $4,899.0 million was
approximately 63% in excess of its carrying value.
Our indefinite-lived intangible assets represent trademarks and totaled $903.0 million as of December 29,
2013. We test indefinite-lived intangible assets for impairment annually, or more frequently if events or
changes in circumstances indicate that the assets may be impaired. We did not initially assess our
indefinite-lived intangibles for impairment using only qualitative factors in 2013 and, therefore, we
performed our test for impairment using a quantitative process. Our quantitative process includes
comparing the carrying value to the fair value of our indefinite-lived intangible assets, with any excess
recognized as an impairment loss. Our critical estimates in the determination of the fair value of our
indefinite-lived intangible assets include the anticipated future revenues of company-owned and franchised
restaurants and the resulting cash flows.
We performed our annual indefinite-lived intangible asset impairment test in the fourth quarter of 2013,
which indicated that there had been no impairment.
The estimated fair values of our goodwill reporting units and indefinite-lived intangible assets are subject
to change as a result of many factors including, among others, any changes in our business plans, changing
economic conditions and the competitive environment. Should actual cash flows and our future estimates
vary adversely from those estimates we use, we may be required to recognize impairment charges in future
years.
• Impairment of long-lived assets:
For impairment testing purposes, long-lived assets include our company-owned restaurant assets and their
definite-lived intangible assets, which include favorable leases and reacquired rights under franchise
agreements.
As of December 29, 2013, the net carrying value of our long-lived tangible and definite-lived intangible
assets were $1,165.5 million and $402.8 million, respectively.
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