Wendy's 2013 Annual Report Download - page 73

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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
The Company classifies assets as held for sale and ceases depreciation of the assets when there is a plan for
disposal of the assets and those assets meet the held for sale criteria. Assets held for sale are included in “Prepaid
expenses and other current assets” in the consolidated balance sheets.
Goodwill
Goodwill, representing the excess of the cost of an acquired entity over the fair value of the acquired net assets,
is not amortized. Goodwill associated with our company-owned restaurants is reduced as a result of restaurant
dispositions and is included in the carrying value of the restaurant in determining the gain or loss on disposal. If a
company-owned restaurant is sold within two years of being acquired from a franchisee, the goodwill associated with
the acquisition is written off in its entirety. For goodwill impairment testing purposes, we include two reporting units
comprised of our (1) North America company-owned and franchise restaurants and (2) international franchise
restaurants. The Company tests goodwill for impairment annually during the fourth quarter, or more frequently if
events or changes in circumstances indicate that the asset may be impaired.
If the Company determines that impairment may exist, the amount of the impairment loss is measured as the
excess, if any, of the carrying amount of the goodwill over its implied fair value. In determining the implied fair value
of the reporting unit’s goodwill, the Company allocates the fair value of a reporting unit to all of the assets and
liabilities of that unit as if the unit had been acquired in a business combination and the fair value of the reporting
unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the
amounts assigned to the assets and liabilities is the implied fair value of goodwill. If the carrying amount of a reporting
unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to
that excess.
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 use, we may be required to recognize goodwill 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. 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 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 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.
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