Red Lobster 2013 Annual Report Download - page 47

Notes to Consolidated Financial Statements
Darden
Darden Restaurants, Inc. 2013 Annual Report 43
in the period incurred. Upon disposal of the assets, primarily land, associated
with a closed restaurant, any gain or loss is recorded in the same caption within
our consolidated statements of earnings as the original impairment.
INSURANCE ACCRUALS
Through the use of insurance program deductibles and self-insurance, we retain
a significant portion of expected losses under our workers’ compensation, certain
employee medical and general liability programs. However, we carry insurance
for individual workers’ compensation and general liability claims that exceed
$0.5 million. Accrued liabilities have been recorded based on our estimates of the
anticipated ultimate costs to settle all claims, both reported and not yet reported.
REVENUE RECOGNITION
Sales, as presented in our consolidated statements of earnings, represents food
and beverage product sold and is presented net of discounts, coupons, employee
meals, and complimentary meals and gift cards. Revenue from restaurant sales
is recognized when food and beverage products are sold. Sales taxes collected
from customers and remitted to governmental authorities are presented on a
net basis within sales in our consolidated statements of earnings.
Revenue from the sale of franchises is recognized as income when substantially
all of our material obligations under the franchise agreement have been performed.
Continuing royalties, which are a percentage of net sales of franchised restaurants,
are accrued as income when earned. Revenue from the sale of consumer pack-
aged goods includes ongoing royalty fees based on a percentage of licensed
retail product sales and is recognized upon the sale of product by our licensed
manufacturers to retail outlets.
UNEARNED REVENUES
Unearned revenues represent our liability for gift cards that have been sold but
not yet redeemed. We recognize sales from our gift cards when the gift card is
redeemed by the customer. Although there are no expiration dates or dormancy
fees for our gift cards, based on our analysis of our historical gift card redemption
patterns, we can reasonably estimate the amount of gift cards for which redemp-
tion is remote, which is referred to as “breakage.” We recognize breakage within
sales for unused gift card amounts in proportion to actual gift card redemptions,
which is also referred to as the “redemption recognition” method. The estimated
value of gift cards expected to remain unused is recognized over the expected
period of redemption as the remaining gift card values are redeemed, generally
over a period of 10 years. Utilizing this method, we estimate both the amount of
breakage and the time period of redemption. If actual redemption patterns vary
from our estimates, actual gift card breakage income may differ from the amounts
recorded. We update our estimates of our redemption period and our breakage
rate periodically and apply that rate to gift card redemptions.
FOOD AND BEVERAGE COSTS
Food and beverage costs include inventory, warehousing, related purchasing and
distribution costs and gains and losses on certain commodity derivative contracts.
Vendor allowances received in connection with the purchase of a vendor’s products
are recognized as a reduction of the related food and beverage costs as earned.
Advance payments are made by the vendors based on estimates of volume to be
purchased from the vendors and the terms of the agreement. As we make purchases
from the vendors each period, we recognize the pro rata portion of allowances
earned as a reduction of food and beverage costs for that period. Differences
between estimated and actual purchases are settled in accordance with the terms
of the agreements. Vendor agreements are generally for a period of one year or
more and payments received are initially recorded as long-term liabilities. Amounts
expected to be earned within one year are recorded as current liabilities.
INCOME TAXES
We provide for federal and state income taxes currently payable as well as for
those deferred because of temporary differences between reporting income and
expenses for financial statement purposes versus tax purposes. Federal income
tax credits are recorded as a reduction of income taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differ-
ences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or set-
tled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in earnings in the period that includes the enactment date. Interest
recognized on reserves for uncertain tax positions is included in interest, net in
our consolidated statements of earnings. A corresponding liability for accrued
interest is included as a component of other current liabilities on our consolidated
balance sheets. Penalties, when incurred, are recognized in selling, general and
administrative expenses.
ASC Topic 740, Income Taxes, requires that a position taken or expected to be
taken in a tax return be recognized (or derecognized) in the financial statements
when it is more likely than not (i.e., a likelihood of more than 50 percent) 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percentlikelyofbeingrealizeduponultimatesettlement.SeeNote16–
Income Taxes for additional information.
Income tax benefits credited to equity relate to tax benefits associated with
amounts that are deductible for income tax purposes but do not affect earnings.
These benefits are principally generated from employee exercises of non-qualified
stock options and vesting of employee restricted stock awards.
DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES
We enter into derivative instruments for risk management purposes only,
including derivatives designated as hedging instruments as required by FASB
ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges.
We use financial and commodities derivatives to manage interest rate, compen-
sation, commodities pricing and foreign currency exchange rate risks inherent in
our business operations. Our use of derivative instruments is currently limited to
interestratehedges;equityforwardscontracts;commoditiesfuturesandoptions
contracts and foreign currency forward contracts. These instruments are generally
structured as hedges of the variability of cash flows related to forecasted trans-
actions (cash flow hedges). However, we do at times enter into instruments
designated as fair value hedges to reduce our exposure to changes in fair value of
the related hedged item. We do not enter into derivative instruments for trading or
speculative purposes, where changes in the cash flows or fair value of the deriva-
tive are not expected to offset changes in cash flows or fair value of the hedged item.
However, we have entered into equity forwards to economically hedge changes in