Baskin Robbins 2013 Annual Report Download - page 60

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license rights, and operating leases acquired recorded in the consolidated balance sheets were valued using an appropriate
valuation method during the period of acquisition. 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 straight-line method.
Our amortizable intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the
carrying amount of the intangible asset may not be recoverable. An intangible asset that is deemed impaired is written down to
its estimated fair value, which is based on discounted cash flows.
Income taxes
Our major tax jurisdictions subject to income tax are the U.S. and Canada. The majority of our legal entities were converted to
limited liability companies (“LLCs”) on March 1, 2006 and a number of new LLCs were created on or about March 15, 2006.
All of these LLCs are single member entities which are treated as disregarded entities and included as part of DBGI in the
consolidated federal income tax return. We also have subsidiaries in foreign jurisdictions that file separate tax returns in their
respective countries and local jurisdictions, as required. In addition to Canada, the foreign jurisdictions that our subsidiaries file
tax returns include the United Kingdom, Australia, Spain, and China. The current income tax liabilities for our foreign
subsidiaries are calculated on a stand-alone basis. The current federal tax liability for each entity included in our consolidated
federal income tax return is calculated on a stand-alone basis, including foreign taxes, for which a separate company foreign tax
credit is calculated in lieu of a deduction for foreign withholding taxes paid. As a matter of course, we are regularly audited by
federal, state, and foreign tax authorities.
Deferred tax assets and liabilities are recorded for the expected future tax consequences of items that have been included in our
consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences
between the financial statement carrying amounts of assets and liabilities and the respective tax bases of assets and liabilities
using enacted tax rates that are expected to apply in years in which the temporary differences are expected to reverse. The
effects of changes in tax rate and changes in apportionment of income between tax jurisdictions on deferred tax assets and
liabilities are recognized in the consolidated statements of operations in the year in which the law is enacted or change in
apportionment occurs. Valuation allowances are provided when we do not believe it is more likely than not that we will realize
the benefit of identified tax assets.
A tax position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than
not that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the
largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Estimates of interest
and penalties on unrecognized tax benefits are recorded in the provision for income taxes.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
Legal contingencies
We are engaged in litigation that arises in the ordinary course of business as a franchisor. Such matters typically include
disputes related to compliance with the terms of franchise and development agreements, including claims or threats of claims of
breach of contract, negligence, and other alleged violations by us. We record reserves for legal contingencies when information
available to us 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign exchange risk
We are subject to inherent risks attributed to operating in a global economy. Most of our revenues, costs and debts are
denominated in U.S. dollars. Our investments in, and equity income from, joint ventures are denominated in foreign currencies,
and are therefore subject to foreign currency fluctuations. For fiscal year 2013, a 5% change in foreign currencies relative to the
U.S. dollar would have had an approximately $0.9 million impact on equity in net income of joint ventures. Additionally, a 5%