Wendy's 2008 Annual Report Download - page 71

information, including legal defenses available to us, and given the aforementioned reserves and our insurance
coverage, we do not believe that the outcome of these legal and environmental matters will have a material
adverse effect on our consolidated financial position or results of operations.
Application of Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with GAAP requires us to make
estimates and assumptions in applying our critical accounting policies that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amount of revenues and expenses during the reporting period. Our estimates and
assumptions concern, among other things, goodwill impairment, impairment of long-lived assets, other than
temporary losses on investments, losses due to investment collectability, valuations of some of our investments,
uncertainties for tax, legal and environmental matters, and accounting for leases. We evaluate those estimates
and assumptions on an ongoing basis based on historical experience and on various other factors which we
believe are reasonable under the circumstances.
We believe that the following represent our more critical estimates and assumptions used in the
preparation of our consolidated financial statements:
•Goodwill impairment:
Following the Wendy’s Merger, the Company operates in two business segments consisting of two
restaurant brands: (1) Wendy’s restaurant operations and (2) Arby’s restaurant operations. Each segment
includes Company-owned restaurants and franchise reporting units which are considered to be separate
reporting units for purposes of measuring goodwill impairment under SFAS 142. As of December 28,
2008, Wendy’s goodwill of $836.2 million relates entirely to the Wendy’s franchise reporting unit.
Also, Arby’s goodwill of $17.6 million relates entirely to the Arby’s franchise operations.
We test goodwill for impairment annually, or more frequently if events or changes in circumstances
indicate that the asset may be impaired, by comparing the fair value of each reporting unit, using
discounted cash flows or market multiples based on earnings, to the carrying value to determine if there
is an indication that a potential impairment may exist. If we determine that an impairment may exist,
we then measure the amount of the impairment loss as the excess, if any, of the carrying amount of the
goodwill over its implied fair value. In determining the implied fair value of the reporting unit’s
goodwill, the Company allocates the fair value of a reporting unit to all of the assets and liabilities of
that unit as if the unit had been acquired in a business combination and the fair value of the reporting
unit was the price paid to acquire the reporting unit. The excess of the fair value of the unit over the
amounts assigned to the assets and liabilities is the implied fair value of goodwill. If the carrying
amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment
loss shall be recognized in an amount equal to that excess. The recoverability of the goodwill for the
reporting periods was determined by management, with the assistance of an independent third-party
valuation firm, and based on estimates we made regarding the present value of the anticipated cash
flows associated with each reporting unit. Those estimates are subject to change as a result of many
factors including, among others, any changes in our business plans, changing economic conditions and
the competitive environment. Should actual cash flows and our future estimates vary adversely from
those estimates we used, we may be required to recognize additional goodwill impairment charges in
future years. Further, the fair value of the reporting unit can be determined under several different
methods, of which discounted cash flows is one alternative. Had we utilized an alternative method, the
amount of any potential goodwill impairment charge might have differed significantly from the
amounts as determined.
During the second and third quarters of 2008, we performed interim goodwill impairment tests at our
Arby’s company-owned restaurant and franchise operations reporting units due to the general economic
downturn, a decrease in market valuations, and decreases in Arby’s same store sales. The results of these
interim tests indicated that the fair values of each of these Arby’s reporting units exceeded their
carrying values.
During the fourth quarter of 2008, we performed our annual goodwill impairment test. As a result of
the acceleration of the general economic and market downturn as well as continued decreases in Arby’s
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