Wendy's 2013 Annual Report Download - page 57

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. We assess the recoverability of our long-lived
assets by comparing the carrying amount of the asset group to future undiscounted net cash flows expected
to be generated by our individual company-owned restaurants. If the carrying amount of the long-lived
asset group is not recoverable on an undiscounted cash flow basis, then impairment is recognized to the
extent that the carrying amount exceeds its fair value and is included in “Impairment of long-lived assets.”
Our critical estimates in this review process include the anticipated future cash flows of each
company-owned restaurant used in assessing the recoverability of their respective long-lived assets. Our
restaurant impairment losses principally reflect impairment charges resulting from the deterioration in
operating performance of certain company-owned restaurants.
As a result of the Company’s system optimization initiative announced in the second quarter of 2013, the
Company has recorded losses on remeasuring long-lived assets to fair value upon determination that the
assets will be leased and/or subleased to franchisees in connection with the sale or anticipated sale of
restaurants (“System Optimization Remeasurement”). Such losses have been included in “Facilities action
charges, net” in our consolidated statement of operations for the year ended December 29, 2013. The fair
value of these long-lived assets was based upon discounted cash flows of future anticipated lease and
sublease income.
Our fair value estimates 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 used, we may be required
to recognize additional impairment charges in future years.
• Our ability to realize deferred tax assets:
We account for income taxes under the asset and liability method. A deferred tax asset or liability is
recognized whenever there are (1) future tax effects from temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and (2) operating
loss, capital loss, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to the years in which those differences are expected to be recovered or settled.
Deferred tax assets are recognized to the extent the Company believes these assets will more likely than not
be realized. In evaluating the realizability of deferred tax assets, the Company considers all available
positive and negative evidence, including the interaction and the timing of future reversals of existing
temporary differences, recent operating results, tax-planning strategies, and projected future taxable
income. In projecting future taxable income, we begin with historical results adjusted for the results of
discontinued operations and incorporate assumptions including future operating income, the reversal of
temporary differences and the implementation of feasible and prudent tax planning strategies. These
assumptions require significant judgment and are consistent with the plans and estimates we are using to
manage our underlying business. In evaluating the objective evidence that historical results provide, we
consider three years of cumulative operating income.
When considered necessary, a valuation allowance is recorded to reduce the carrying amount of the
deferred tax assets to their anticipated realizable value. Our evaluation of the realizability of our deferred
tax assets is subject to change as a result of many factors including, among others, any changes in our
business plans, changing economic conditions, the competitive environment and the effect of future tax
legislation. Should future taxable income vary from projected taxable income, we may be required to adjust
our valuation allowance in future years.
At December 29, 2013 we have federal net operating losses of $77.2 million which will expire beginning
2031. Tax credits of $102.8 million at December 29, 2013, principally consisting of foreign tax credits
and jobs credits, expire beginning in 2015. State net operating losses are subject to various limitations
including carryforward periods and begin expiring in 2014. We believe it is more likely than not that the
benefit from certain state net operating loss carryforwards will not be realized. In recognition of this risk,
we have provided a valuation allowance of $10.5 million.
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