Baskin Robbins 2012 Annual Report Download - page 70

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(k) Equity method investments
The Company's equity method investments primarily consist of joint venture interests in B-R 31 Ice Cream Co., Ltd.
(“BR Japan”) and BR-Korea Co., Ltd. (“BR Korea”), which are accounted for in accordance with the equity method. As a
result of the acquisition of the Company by BCT (see note 19(a)) on March 1, 2006 (“BCT Acquisition”), the Company
recorded a step-up in the basis of our investments in BR Japan and BR Korea. The basis difference is comprised of amortizable
franchise rights and related tax liabilities and nonamortizable goodwill. The franchise rights and related tax liabilities are
amortized in a manner that reflects the estimated benefits from the use of the intangible asset over a period of 14 years. The
franchise rights were valued based on an estimate of future cash flows to be generated from the ongoing management of the
contracts over their remaining useful lives.
(l) 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.
Other intangible assets consist primarily of franchise and international license rights (“franchise rights”), ice cream distribution
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 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 16 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