Wendy's 2008 Annual Report Download - page 74

broker/dealer prices or statements of account received from investment managers, which were
principally based on quoted market or broker/dealer prices. Our other investments accounted for under
the cost method are valued almost entirely based on statements of account received from the investment
managers or the investees which are principally based on quoted market or broker/dealer prices. To the
extent that some of these investments, including the underlying investments in investment limited
partnerships, do not have available quoted market or broker/dealer prices, we rely on unobservable
inputs (that are not corroborated by observable market data) that reflect assumptions market
participants would use in pricing the investment. These inputs are subjective and thus subject to
estimates which could change significantly from period to period. Those changes in estimates in these
cost investments would be recognized only to the extent of losses which are deemed to be other than
temporary. We believe that the total carrying value of the cost investments not valued based on quoted
market or broker/dealer prices of approximately $12.0 million as of December 28, 2008 represented
their fair value. We also have $0.8 million of non-marketable cost investments in securities for which it
is not practicable to estimate fair value because the investments are non-marketable, but we currently
believe the carrying amount is recoverable.
•Federal and state income tax contingencies:
We recognize the income tax benefits and estimated accruals for the resolution of income tax matters
which are subject to future examinations of our U.S. Federal and state income tax returns by the
Internal Revenue Service or state taxing authorities, including remaining provisions included in
“Current liabilities relating to discontinued operations” in our Consolidated Balance Sheets:
Effective January 1, 2007, we adopted FIN 48. As a result, we now measure income tax uncertainties in
accordance with a two-step process of evaluating a tax position. We first determine if it is more likely
than not that a tax position will be sustained upon examination based on the technical merits of the
position. A tax position that meets the more-likely-than-not recognition threshold is then measured, for
purposes of financial statement recognition, as the largest amount that has a greater than fifty percent
likelihood of being realized upon effective settlement. With the adoption of FIN 48, at January 1, 2007
we recognized an increase in our reserves for uncertain income tax positions of $4.8 million, an increase
in our liability for interest of $0.5 million and an increase in our liability for penalties of $0.2 million
related to uncertain income tax positions. These increases were partially offset by an increase in a
deferred income tax benefit of $3.2 million. There was also a reduction in the tax related liabilities of
discontinued operations of $0.1 million. The net effect of all these adjustments was a decrease in
retained earnings of $2.2 million. We have unrecognized tax benefits of $30.3 million and $12.3
million, which if resolved favorably would reduce the Company’s tax expense by $22.2 million and
$9.5 million, at December 28, 2008 and December 30, 2007, respectively.
We recognize interest accrued related to uncertain tax positions in “Interest expense” and penalties in
“General and administrative expenses”. At December 28, 2008 and December 30, 2007 we had $6.2
million and $3.4 million accrued for the payment of interest and $1.9 million and $0.2 million accrued
for penalties, both respectively.
As discussed above in “Liquidity and Capital Resources,” our U.S. Federal income tax return for the tax
period ended December 28, 2008 is under examination as part of the CAP program. Our U.S. Federal
income tax returns for January 1, 2006 to and including September 29, 2008 are not currently under
examination while certain of our state income tax returns and certain of Wendy’s state income tax
returns for periods prior to the merger are under examination. We believe that adequate provisions have
been made for any liabilities, including interest and penalties that may result from the completion of
these examinations. To the extent uncertain tax positions pertaining to the former beverage businesses
that we sold in October 2000 are determined to be less than or in excess of the amounts included in
“Current liabilities relating to discontinued operations,” any such material difference will be recorded at
that time as a component of gain or loss on disposal of discontinued operations.
•Legal and environmental reserves:
We have reserves which total $6.9 million at December 28, 2008 for the resolution of all of our legal
and environmental matters.
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