Baskin Robbins 2012 Annual Report Download - page 57

-47-
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 three 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 29, 2012, if all of our
outstanding guarantees of franchisee financing obligations came due simultaneously, we would be liable for approximately $4.7
million. As of December 29, 2012, the Company had recorded reserves for such guarantees of $389 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. All of our reporting units have indefinite-lived intangibles associated
with them.
We evaluate the remaining useful life of our trade names to determine whether current events and circumstances continue to
support an indefinite useful life. In addition, all of our indefinite-lived intangible assets are tested for impairment annually. We
first assess qualitative factors to determine whether it is more likely than not that a trade name is impaired. In the event we
were to determine that the carrying value of a trade name would more likely than not exceed its fair value, quantitative testing
would be performed. Quantitative testing consists of a comparison of the fair value of each trade name with its carrying value,
with any excess of carrying value over fair value being recognized as an impairment loss. For goodwill, we first perform a
qualitative assessment to determine if the fair value of the reporting unit is more likely than not greater than the carrying
amount. In the event we were to determine that a reporting unit's carrying value would more likely than not exceed its fair
value, quantitative testing would be performed which consists of a comparison of each reporting unit’s fair value to its carrying
value. The fair value of a reporting unit is an estimate of the amount for which the unit as a whole could be sold in a current
transaction between willing parties. If the carrying value of a reporting unit exceeds its fair value, goodwill is written down to
its implied fair value. We have selected the first day of our fiscal third quarter as the date on which to perform our annual
impairment test for all indefinite-lived intangible assets. We also test for impairment whenever events or circumstances indicate
that the fair value of such indefinite-lived intangibles has been impaired. No impairment of indefinite-lived intangible assets
was recorded during fiscal years 2012, 2011, or 2010.
We have intangible assets other than goodwill and trade names that are amortized on a straight-line basis over their estimated
useful lives or terms of their related agreements. Other intangible assets consist primarily of franchise and international license
rights ("franchise rights"), ice cream manufacturing and territorial franchise agreement license rights ("license rights") and
operating lease interests acquired related to our prime leases and subleases ("operating leases acquired"). Franchise rights
recorded in the consolidated balance sheets were valued using an excess earnings approach. The valuation of 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 our 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 leases 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