Red Lobster 2014 Annual Report Download - page 32

Notes to Consolidated Financial Statements
Darden
30 Darden Restaurants, Inc.
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 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, Eddie V’s and Yard House.
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 posi-
tion 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 25, 2014, a write down of goodwill,
other indefinite-lived intangible assets, or any other assets in excess of
approximately $850.0 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
obsolescence, 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 recoverable. 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 consolidated 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 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’
compen sation, 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. 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 packaged 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.