Wendy's 2013 Annual Report Download - page 74

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
Other Intangible Assets and Deferred Financing Costs
Definite-lived intangible assets are amortized on a straight-line basis using the following estimated useful lives of
the related classes of intangibles: for favorable leases, the terms of the respective leases, including periods covered by
renewal options that the Company is reasonably assured of exercising; 3 to 5 years for computer software; 3 to 20
years for reacquired rights under franchise agreements; and 20 years for franchise agreements. Trademarks have an
indefinite life and are not amortized.
The Company reviews definite-lived intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the intangible asset may not be recoverable. Indefinite-lived
intangible assets are tested for impairment at least annually by comparing their carrying value to fair value; any excess
of carrying value over fair value is recognized as an impairment loss. Our estimates in the determination of the fair
value of indefinite-lived intangible assets include the anticipated future revenues of company-owned and franchised
restaurants and the resulting cash flows.
Deferred financing costs are amortized as interest expense over the term of the respective debt using the effective
interest rate method.
Derivative Instruments
The Company enters into interest rate swap agreements to manage its exposure to changes in interest rates as
well as to maintain an appropriate mix of fixed and variable rate debt. Floating to fixed interest rate swap agreements
are accounted for as cash flow hedges. Changes in the fair value of our cash flow hedging instruments are recorded as
an adjustment to “Accumulated other comprehensive (loss) income” to the extent of the effectiveness of such hedging
instruments and is subsequently reclassified into “Interest expense” in the period that the hedged forecasted
transaction affects earnings. Fixed to floating interest rate swap agreements are accounted for as fair value hedges.
Changes in the fair value of our fair value hedging instruments are recorded as an adjustment to the underlying debt
balance being hedged to the extent of the effectiveness of such hedging instruments. Any ineffective portion of the
change in fair value of the designated hedging instruments is included in “Other (expense) income, net.”
Share-Based Compensation
The Company has granted share-based compensation awards to certain employees under several equity plans.
The Company measures the cost of employee services received in exchange for an equity award, which include grants
of employee stock options and restricted shares, based on the fair value of the award at the date of grant. Share-based
compensation expense is recognized net of estimated forfeitures, determined based on historical experience. The
Company recognizes share-based compensation expense over the requisite service period unless the awards are subject
to performance conditions, in which case they recognize compensation expense over the requisite service period to the
extent performance conditions are considered probable. The Company determines the grant date fair value of stock
options using a Black-Scholes-Merton option pricing model (the “Black-Scholes Model”) unless the awards are
subject to market conditions, in which case we use a Monte Carlo simulation model. The Monte Carlo simulation
model utilizes multiple input variables to estimate the probability that market conditions will be achieved.
Foreign Currency Translation
Substantially all of the Company’s foreign operations are in Canada where the functional currency is the
Canadian dollar. Financial statements of foreign subsidiaries are prepared in their functional currency and then
translated into U.S. dollars. Assets and liabilities are translated at the exchange rate as of the balance sheet date and
revenues, costs and expenses are translated at a monthly average exchange rate. Net gains or losses resulting from the
translation adjustment are charged or credited directly to the “Foreign currency translation adjustment” component of
“Accumulated other comprehensive (loss) income.” Gains and losses arising from the impact of foreign currency
exchange rate fluctuations on transactions in foreign currency are included in “General and administrative.”
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