Wendy's 2009 Annual Report Download - page 66

periods for which failure to renew the lease imposes an economic detriment. The primary penalty to
which we are subject is the economic detriment associated with the existence of leasehold improvements
which might be impaired if we choose not to exercise the available renewal options.
For operating leases, minimum lease payments, including minimum scheduled rent increases, are
recognized as rent expense on a straight line basis (“Straight-Line Rent”) over the applicable lease terms.
Lease terms are generally for 20 years and, in most cases, provide for rent escalations and renewal
options. The term used for Straight-Line Rent expense is calculated from the date we obtain possession
of the leased premises through the expected lease termination date at lease inception. We expense rent
from possession date to the restaurant opening date. There is a period under certain lease agreements
referred to as a rent holiday (“Rent Holiday”) that generally begins on the possession date and ends on
the rent commencement date. During the Rent Holiday period, no cash rent payments are typically due
under the terms of the lease, however, expense is recorded for that period consistent with the Straight-
Line Rent policy.
For leases that contain rent escalations, we record the rent payable during the lease term, as determined
above, on the straight-line basis over the term of the lease (including the rent holiday period beginning
upon our possession of the premises), and record the excess of the Straight-Line Rent over the minimum
rents paid as a deferred lease liability included in “Other liabilities.” Certain leases contain provisions,
referred to as contingent rent (“Contingent Rent”), that require additional rental payments based upon
restaurant sales volume. Contingent rent is expensed each period as the liability is incurred.
Favorable and unfavorable lease amounts are recorded as components of “Other intangible assets” and
“Other liabilities”, respectively, when we purchase restaurants and are amortized to “Cost of sales”—
both on a straight-line basis over the remaining term of the leases. When the expected term of a lease,
including early terminations, is determined to be shorter than the original amortization period, the
favorable or unfavorable lease balance associated with the lease is adjusted to reflect the revised lease
term and a gain or loss recognized.
Management, with the assistance of a valuation firm, makes certain estimates and assumptions
regarding each new lease agreement, lease renewal, and lease amendment, including, but not limited to
property values, market rents, property lives, discount rates, and probable term, all of which can impact
(1) the classification and accounting for a lease as capital or operating, (2) the rent holiday and/or
escalations in payment that are taken into consideration when calculating straight-line rent, (3) the
term over which leasehold improvements for each restaurant are amortized and (4) the values and lives
of favorable and unfavorable leases. These estimates and assumptions may produce materially different
amounts of depreciation and amortization, interest and rent expense that would be reported if different
assumed lease terms were used.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2009, the Financial Accounting Standards Board (the “FASB”) issued guidelines on the
consolidation of variable interest entities which alters how a company determines when an entity that is
insufficiently capitalized or not controlled through voting interests should be consolidated. A company has to
determine whether it should provide consolidated reporting of an entity based upon the entity’s purpose and
design and the parent company’s ability to direct the entity’s actions. The guidance is effective commencing
with our 2010 fiscal year. We do not expect adoption of this guidance to have a material impact on our
consolidated financial statements.
In January 2010, the FASB issued amendments to the existing fair value measurements and disclosures
guidance which requires new disclosures and clarifies existing disclosure requirements. The purpose of these
amendments is to provide a greater level of disaggregated information as well as more disclosure around
valuation techniques and inputs to fair value measurements. The guidance is effective commencing with our
2010 fiscal year. We do not expect adoption of this standard to have a material effect on our consolidated
financial statements.
59