Popeye's 2014 Annual Report Download - page 67

Popeyes Louisiana Kitchen, Inc.
Notes to Consolidated Financial Statements
For Fiscal Years 2014, 2013, and 2012 — (Continued)
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Property and Equipment. Property and equipment is stated at cost less accumulated depreciation.
Provisions for depreciation are made using the straight-line method over an asset’s estimated useful life: 7 to 35 years for
buildings; 5 to 15 years for equipment; and in the case of leasehold improvements and capital lease assets, the lesser of the economic
life of the asset or the lease term (generally 3 to 20 years). During 2014, 2013, and 2012, depreciation expense was approximately
$8.2 million, $6.2 million, and $4.0 million, respectively.
The Company capitalizes interest on external costs in connection with the construction of new restaurants. The capitalized
interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. Interest expense
of $0.2 million was capitalized in 2013. No significant interest was incurred for such purposes in 2014 and 2012.
The Company evaluates property and equipment for impairment during the fourth quarter of each year or when circumstances
arise indicating that a particular asset may be impaired. For property and equipment at company-operated restaurants, annual
impairment evaluations are performed on an individual restaurant basis. The Company evaluates restaurants using a “two-year
history of operating losses” as our primary indicator of potential impairment. The Company evaluates recoverability based on the
restaurant’s forecasted undiscounted cash flows for the expected remaining useful life of the unit, which incorporate our best
estimate of sales growth and margin improvement based upon our plans for the restaurant and actual results at comparable
restaurants. The carrying values of restaurant assets that are not considered recoverable are written down to their estimated fair
market value, which are generally measured by discounting estimated future cash flows.
Goodwill and Indefinite Lived Intangible Assets. Amounts assigned to goodwill arose from the allocation of reorganization
value when the Company emerged from bankruptcy in 1992 and from business combinations accounted for by the purchase method.
Amounts assigned to trademarks arose from the allocation of reorganization value when the Company emerged from bankruptcy
in 1992. These assets are deemed indefinite-lived assets and are not amortized for financial reporting purposes. See Note 6 for
further disclosure.
The Company’s finite-lived intangible assets (primarily re-acquired franchise rights) are amortized on a straight-line basis over
10 to 20 years based on the remaining life of the original franchise agreement or lease agreement.
Costs incurred to renew or extend the term of recognized intangibles are expensed as incurred and reported as a component of
“General and administrative expenses.”
The Company evaluates goodwill, trademarks, recipes and formulas, and other indefinite lived intangible assets for impairment
on an annual basis (during the fourth quarter of each year) or more frequently when circumstances arise indicating that a particular
asset may be impaired. The impairment evaluation for goodwill includes a comparison of the fair value of each of the Company’s
reporting units with their carrying value. The Company’s reporting units are its business segments. Goodwill is allocated to each
reporting unit for purposes of this analysis. Goodwill associated with bankruptcy reorganization value is assigned to reporting
units using a relative fair value approach. Goodwill associated with a business combination is allocated to the reporting unit or a
component of the reporting unit expected to benefit from the synergies of the combination. The fair value of each reporting unit
is the amount for which the reporting unit could be sold in a current transaction between willing parties. The Company estimates
the fair value of its reporting units using a discounted cash flow model. The operating assumptions used in the discounted cash
flow model are generally consistent with the reporting unit’s past performance and with the projections and assumptions that are
used in the Company’s current operating plans. Such assumptions are subject to change as a result of changing economic and
competitive conditions. If a reporting unit’s carrying value exceeds its fair value, goodwill is written down to its implied fair value.
The Company follows a similar analysis for the evaluation of trademarks, recipes and formulas, and other indefinite lived intangible
assets but that analysis is performed on a consolidated basis. During 2014, 2013, and 2012, there was no impairment of goodwill
or trademarks identified during the Company’s annual impairment testing.
In 2014, the Company purchased the recipes and formulas (the "formulas") it uses in the preparation of many of its core menu
items from Diversified Foods and Seasonings, L.L.C.. The Company recorded an intangible asset of $41.8 million, for these
formulas that were previously licensed to the Company. See Note 6 and Note 15 for further discussion on this commitment.
Fair Value Measurements. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability (exit
price) in an orderly transaction between market participants. For those assets and liabilities recorded or disclosed at fair value, we
determine fair value based upon the quoted market price, if available. If a quoted market price is not available for identical assets,
we determine fair value based upon the quoted market price of similar assets or the present value of expected future cash flows
considering the risks involved, including counterparty performance risk if appropriate, and using discount rates appropriate for