Red Lobster 2013 Annual Report Download - page 46

Notes to Consolidated Financial Statements
Darden
42 Darden Restaurants, Inc. 2013 Annual Report
companies with similar operating and investment characteristics of the reporting
units. If the fair value of the reporting unit is higher than its carrying value,
goodwill is deemed not to be impaired, and no further testing is required. If the
carrying value of the reporting unit is higher than its fair value, there is an indication
that impairment may exist and the second step must be performed to measure
the amount of impairment loss. The amount of impairment is determined by
comparing the implied fair value of reporting unit goodwill to the carrying value
of the goodwill in the same manner as if the reporting unit was being acquired
in a business combination. Specifically, fair value is allocated to all of the assets
and liabilities of the reporting unit, including any unrecognized intangible assets,
in a hypothetical analysis that would calculate the implied fair value of goodwill.
If the implied fair value of goodwill is less than the recorded goodwill, we would
record an impairment loss for the difference.
Consistent with our accounting policy for goodwill and trademarks we
performed our annual impairment test of our goodwill and trademarks as of the
first day of our fiscal 2013 fourth quarter. As of the beginning of our fiscal fourth
quarter, we had eight reporting units, six of which had goodwill: Red Lobster,
Olive Garden, LongHorn Steakhouse, The Capital Grille, Eddie V’s and Yard House.
As part of our process for performing the step one impairment test of goodwill,
we estimated the fair value of our reporting units utilizing the income and market
approaches described above to derive an enterprise value of the Company. We
reconciled the enterprise value to our overall estimated market capitalization. The
estimated market capitalization considers recent trends in our market capitaliza-
tion and an expected control premium, based on comparable recent and historical
transactions. Based on the results of the step one impairment test, no impairment
of goodwill was indicated. As we finalized the purchase price allocation for Yard
House during our fourth fiscal quarter of 2013, we excluded the goodwill allocated
to Yard House from our step one impairment test, however, we did perform a
qualitative assessment of the goodwill allocated to Yard House in accordance with
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC)Topic350,Intangibles–GoodwillandOther,andnoindicatorsofimpairment
were identified.
The fair value of trademarks are estimated and compared to the carrying
value. We estimate the fair value of trademarks using the relief-from-royalty
method, which requires assumptions related to projected sales from our annual
long-rangeplan;assumedroyaltyratesthatcouldbepayableifwedidnotown
thetrademarks;andadiscountrate.Werecognizeanimpairmentlosswhenthe
estimated fair value of the trademarks is less than its carrying value. We completed
our impairment test and concluded as of the date of the test, there was no
impairment of the trademarks for LongHorn Steakhouse, The Capital Grille and
Eddie V’s. As we finalized the purchase price allocation for Yard House during our
fourth fiscal quarter of 2013, we excluded the trademark related to Yard House from
our annual impairment test, however, we did perform a qualitative assessment
oftheYardHousetrademarkinaccordancewithASCTopic350,Intangibles–
Goodwill and Other, and no indicators of impairment were identified.
We determined that there was no goodwill or trademark impairment as of
the first day of our fourth fiscal quarter and no additional indicators of impairment
were identified through the end of our fourth fiscal quarter that would require
us to test further for impairment. However, declines in our market capitalization
(reflected in our stock price) as well as in the market capitalization of other
companies in the restaurant industry, declines in sales at our restaurants, and
significant adverse changes in the operating environment for the restaurant
industry may result in future impairment.
Changes in circumstances, existing at the measurement date or at other
times in the future, or in the numerous estimates associated with management’s
judgments and assumptions made in assessing the fair value of our goodwill,
could result in an impairment loss of a portion or all of our goodwill or trademarks.
If we recorded an impairment loss, our financial position and results of operations
would be adversely affected and our leverage ratio for purposes of our credit
agreement would increase. A leverage ratio exceeding the maximum permitted
under our credit agreement would be a default under our credit agreement. At
May 26, 2013, a write down of goodwill, other indefinite-lived intangible assets,
or any other assets in excess of approximately $810.0 million would have been
required to cause our leverage ratio to exceed the permitted maximum. As our
leverage ratio is determined on a quarterly basis and due to the seasonal nature
of our business, a lesser amount of impairment in future quarters could cause
our leverage ratio to exceed the permitted maximum.
We evaluate the useful lives of our other intangible assets, to determine
if they are definite or indefinite-lived. A determination on useful life requires
significant judgments and assumptions regarding the future effects of obsoles-
cence, demand, competition, other economic factors (such as the stability of the
industry, legislative action that results in an uncertain or changing regulatory
environment, and expected changes in distribution channels), the level of
required maintenance expenditures, and the expected lives of other related
groups of assets.
IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS
Land, buildings and equipment and certain other assets, including definite-lived
intangible assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recover-
able. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of the assets to the future undiscounted net cash flows
expected to be generated by the assets. Identifiable cash flows are measured at
the lowest level for which they are largely independent of the cash flows of other
groups of assets and liabilities, generally at the restaurant level. If such assets are
determined to be impaired, the impairment recognized is measured by the
amount by which the carrying amount of the assets exceeds their fair value. Fair
value is generally determined based on appraisals or sales prices of comparable
assets. Restaurant sites and certain other assets to be disposed of are reported
at the lower of their carrying amount or fair value, less estimated costs to sell.
Restaurant sites and certain other assets to be disposed of are included in assets
held for disposal within prepaid expenses and other current assets in our consoli-
dated balance sheets when certain criteria are met. These criteria include the
requirement that the likelihood of disposing of these assets within one year is
probable. Assets not meeting the “held for sale” criteria remain in land, buildings
and equipment until their disposal is probable within one year.
We account for exit or disposal activities, including restaurant closures, in
accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 420, Exit or Disposal Cost Obligations. Such costs include
the cost of disposing of the assets as well as other facility-related expenses from
previously closed restaurants. These costs are generally expensed as incurred.
Additionally, at the date we cease using a property under an operating lease, we
record a liability for the net present value of any remaining lease obligations, net
of estimated sublease income. Any subsequent adjustments to that liability as a
result of lease termination or changes in estimates of sublease income are recorded