Dunkin' Donuts 2011 Annual Report Download - page 75

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 rates on deferred tax assets and
liabilities are recognized in the consolidated statements of operations in the year in which the law is enacted.
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 50% 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.
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
2011, a 5% change in foreign currencies relative to the U.S. dollar would have had a $0.2 million impact on
equity in net income of joint ventures. Additionally, a 5% change in foreign currencies as of December 31, 2011
would have had an $8.2 million impact on the carrying value of our investments in joint ventures. In the future,
we may consider the use of derivative financial instruments, such as forward contracts, to manage foreign
currency exchange rate risks.
Interest rate risk
We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate exposure
mainly relates to the term loan outstanding under our senior credit facility. We have a $1.50 billion term loan
facility bearing interest at variable rates. Each eighth of a percentage point change in interest rates above the
minimum interest rate specified in the senior credit facility would result in a $1.9 million change in annual
interest expense on our term loan facility. We also have a revolving credit facility, which provides for
borrowings of up to $100.0 million and bears interest at variable rates. Assuming the revolver is fully drawn,
each eighth of a percentage point change in interest rates above the minimum interest rate specified in the senior
credit facility would result in a $0.1 million change in annual interest expense on our revolving loan facility.
In the future, we may enter into hedging instruments, involving the exchange of floating for fixed rate interest
payments, to reduce interest rate volatility.
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