Baskin Robbins 2011 Annual Report Download - page 71

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These judgments involve estimations of the effect of matters that are inherently uncertain and may have a
significant impact on our quarterly and annual results of operations or financial condition. Changes in estimates
and judgments could significantly affect our result of operations, financial condition, and cash flow in future
years. The following is a description of what we consider to be our most significant critical accounting policies.
Revenue recognition
Initial franchise fee revenue is recognized upon substantial completion of the services required of us as stated in
the franchise agreement, which is generally upon opening of the respective restaurant. Fees collected in advance
are deferred until earned. Royalty income is based on a percentage of franchisee gross sales and is recognized
when earned, which occurs at the franchisees’ point of sale. Renewal fees are recognized when a renewal
agreement with a franchisee becomes effective. Rental income for base rentals is recorded on a straight-line basis
over the lease term. Contingent rent is recognized as earned, and any amounts received from lessees in advance
of achieving stipulated thresholds are deferred until such threshold is actually achieved. Revenue from the sale of
ice cream is recognized when title and risk of loss transfers to the buyer, which is generally upon shipment.
Licensing fees are recognized when earned, which is generally upon sale of the underlying products by the
licensees. Retail store revenues at company-owned restaurants are recognized when payment is tendered at the
point of sale, net of sales tax and other sales-related taxes. Gains on the refranchise or sale of a restaurant are
recognized when the sale transaction closes, the franchisee has a minimum amount of the purchase price in at
risk equity, and we are satisfied that the buyer can meet its financial obligations to us.
Allowances for franchise, license and lease receivables / guaranteed financing
We reserve all or a portion of a franchisee’s receivable balance when deemed necessary based upon detailed
review of such balances, and apply a pre-defined reserve percentage based on an aging criteria to other balances.
We perform our reserve analysis during each fiscal quarter or when events or circumstances indicate that we may
not collect the balance due. While we use the best information available in making our determination, the
ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions
that may be beyond our control.
In limited instances, we issue guarantees to financial institutions so that our franchisees can obtain financing with
terms of approximately five to ten years for various business purposes. We recognize a liability and offsetting
asset for the fair value of such guarantees. The fair value of a guarantee is based on historical default rates of our
total guaranteed loan pool. We monitor the financial condition of our franchisees and record provisions for
estimated losses on guaranteed liabilities of our franchisees if we believe that our franchisees are unable to make
their required payments. As of December 31, 2011, if all of our outstanding guarantees of franchisee financing
obligations came due simultaneously, we would be liable for approximately $6.9 million. As of December 31,
2011, the Company had recorded reserves for such guarantees of $390 thousand. We generally have cross-default
provisions with these franchisees that would put the franchisee in default of its franchise agreement in the event
of non-payment under such loans. We believe these cross-default provisions significantly reduce the risk that we
would not be able to recover the amount of required payments under these guarantees and, historically, we have
not incurred significant losses under these guarantees due to defaults by our franchisees.
Impairment of goodwill and other intangible assets
Goodwill and trade names (indefinite lived intangibles) have been assigned to our reporting units, which are also
our operating segments, for purposes of impairment testing. Our reporting units, which have indefinite lived
intangible assets associated with them, are Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins
U.S., and Baskin-Robbins International.
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