Baskin Robbins 2011 Annual Report Download - page 87

Download and view the complete annual report

Please find page 87 of the 2011 Baskin Robbins annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 127

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127

franchise rights was calculated using an estimation of future royalty income and related expenses associated with
existing franchise contracts at the acquisition date. Our valuation included assumptions related to the projected
attrition and renewal rates on those existing franchise arrangements being valued. License rights recorded in the
consolidated balance sheets were valued based on an estimate of future revenues and costs related to the ongoing
management of the contracts over the remaining useful lives. Favorable and unfavorable operating leases
acquired were recorded on purchased leases based on differences between contractual rents under the respective
lease agreements and prevailing market rents at the lease acquisition date. Favorable operating leases acquired
are included as a component of other intangible assets in the consolidated balance sheets. Due to the high level of
lease renewals made by Dunkin’ Donuts’ franchisees, all lease renewal options for the Dunkin’ Donuts leases
were included in the valuation of the favorable operating leases acquired. Amortization of franchise rights,
license rights, and favorable operating leases acquired is recorded as amortization expense in the consolidated
statements of operations and amortized over the respective franchise, license, and lease terms using the straight-
line method.
Unfavorable operating leases acquired related to our prime and subleases are recorded in the liability section of
the consolidated balance sheets and are amortized into rental expense and rental income, respectively, over the
base lease term of the respective leases using the straight-line method. The weighted average amortization period
for all unfavorable operating leases acquired is 14 years.
Management makes adjustments to the carrying amount of such intangible assets and unfavorable operating
leases acquired if they are deemed to be impaired using the methodology for long-lived assets (see note 2(j)), or
when such license or lease agreements are reduced or terminated.
(m) Contingencies
The Company records reserves for legal and other contingencies when information available to the Company
indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably
estimated. Predicting the outcomes of claims and litigation and estimating the related costs and exposures involve
substantial uncertainties that could cause actual costs to vary materially from estimates. Legal costs incurred in
connection with legal and other contingencies are expensed as the costs are incurred.
(n) Foreign currency translation
We translate assets and liabilities of non-U.S. operations into U.S. dollars at rates of exchange in effect at the
balance sheet date and revenues and expenses at the average exchange rates prevailing during the period.
Resulting translation adjustments are recorded as a separate component of comprehensive income and
stockholders’ equity (deficit), net of deferred taxes. Foreign currency translation adjustments primarily result
from our joint ventures, as well as subsidiaries located in Canada, the UK, Australia, and Spain. Business
transactions resulting in foreign exchange gains and losses are included in the consolidated statements of
operations.
(o) Revenue recognition
Franchise fees and royalty income
Domestically, the Company sells individual franchises as well as territory agreements in the form of store
development agreements (“SDA agreements”) that grant the right to develop restaurants in designated areas. Our
franchise and SDA agreements typically require the franchisee to pay an initial nonrefundable fee and continuing
fees, or royalty income, based upon a percentage of sales. The franchisee will typically pay us a renewal fee if we
approve a renewal of the franchise agreement. Such fees are paid by franchisees to obtain the rights associated
with these franchise or SDA agreements. Initial franchise fee revenue is recognized upon substantial completion
of the services required of the Company as stated in the franchise agreement, which is generally upon opening of
the respective restaurant. Fees collected in advance are deferred until earned, with deferred amounts expected to
-77-