Wendy's 2009 Annual Report Download - page 89

functional currency then translated into United States dollars. Assets and liabilities are translated at the
exchange rate as of the balance sheet date and revenues, costs, and expenses are translated at a monthly average
exchange rate. Net gains or losses resulting from the translation adjustment are charged or credited directly to
the “Foreign currency translation adjustment” component of “Accumulated other comprehensive income (loss).”
Income taxes
We record income tax liabilities based on known obligations and estimates of potential obligations. A
deferred tax asset or liability is recognized whenever there are future tax effects from temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss, capital loss, and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or
settled. When considered necessary, we record a valuation allowance to reduce the carrying amount of deferred
tax assets if it is more likely than not all or a portion of the asset will not be realized.
We apply a recognition threshold and measurement attribute for financial statement recognition and
measurement of potential tax benefits associated with tax positions taken or expected to be taken in income tax
returns (“Uncertain Tax Positions”). A two-step process of evaluating a tax position is followed, whereby we
first determine if it is more likely than not that a tax position will be sustained upon examination, including
resolution of any related appeals or litigation processes, 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 of benefit that is greater than 50 percent likely of being realized
upon being effectively settled. The Company adopted this new accounting guidance related to Uncertain Tax
Positions on January 1, 2007. As a result of adoption, the Company recorded a reduction of retained earnings
of $2,275 as of the beginning of 2007.
Interest accrued for Uncertain Tax Positions is charged to “Interest expense.” Penalties accrued for
Uncertain Tax Positions are charged to “General and administrative.”
Wendy’s/Arby’s files a consolidated Federal income tax return, which includes its principal corporate
subsidiaries. As a result of the Wendy’s Merger, which for tax purposes was treated as a reverse acquisition,
Wendy’s/Arby’s became part of the Wendy’s consolidated group with Wendy’s/Arby’s as its new parent. As a
result, Wendy’s/Arby’s had a short taxable year in 2008 ending on the date of the Wendy’s Merger.
Revenue recognition
“Sales” includes revenues recognized upon delivery of food to the customer at company-owned restaurants,
and revenues for shipments of bakery items and kid’s meal promotional items to our franchisees and others.
“Sales” excludes sales taxes collected from the Company’s customers.
“Franchise revenues” include royalties, franchise fees, and rental income. Royalties from franchised
restaurants are based on a percentage of net sales of the franchised restaurant and are recognized as earned.
Initial franchise fees are recorded as deferred income when received and are recognized as revenue when a
franchised restaurant is opened since all material services and conditions related to the franchise fee have been
substantially performed by the Company upon the restaurant opening. Renewal franchise fees are recognized as
revenue when the license agreements are signed and the fee is paid since there are no material services and
conditions related to the renewal franchise fee. Franchise commitment fee deposits are forfeited and recognized
as revenue upon the termination of the related commitments to open new franchised restaurants. Rental income
from locations owned by the Company and leased to franchisees is recognized on a straight-line basis over the
respective operating lease terms.
Asset management and related fees, earned prior to the Deerfield Sale, consisted of the following types of
revenues: (1) management fees, (2) incentive fees and (3) other related fees. Management fees were recognized as
revenue when the management services had been performed for the period and sufficient cash flows had been
generated by the CDOs to pay the fees under the terms of the related management agreements. In addition, the
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Wendy’s/Arby’s Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)