Wendy's 2009 Annual Report Download - page 90

Company recognized non-cash management fee revenue related to its restricted stock and stock options in DFR
based on their then current fair values which were amortized from deferred income to revenues over the vesting
period. Incentive fees were based upon the performance of the Funds and CDOs and were recognized as
revenues when the amounts became fixed and determinable upon the close of a performance period for the
Funds and all contingencies were resolved. Other related fees primarily included structuring and warehousing
fees earned by the Company for services provided to CDOs and were recognized as revenues upon the rendering
of such services and the closing of the respective CDO.
Vendor incentives
The Company receives incentives from its vendors. These incentives are recognized as earned and are
generally classified as a reduction of “Cost of Sales.”
Advertising costs
The Company incurs various advertising costs, including contributions to certain advertising cooperatives
based upon a percentage of net sales by Company-owned restaurants. All advertising costs are expensed as
incurred, with the exception of media development costs that are expensed beginning in the month that the
advertisement is first communicated, and are included in “Cost of Sales.”
Self-insurance
We are self-insured for most domestic workers’ compensation, health care claims, general liability and
automotive liability losses. We provide for our estimated cost to settle both known claims and claims incurred
but not yet reported. Liabilities associated with these claims are estimated, in part, by considering the
frequency and severity of historical claims, both specific to us as well as industry-wide loss experience, and
other actuarial assumptions. We determine casualty insurance obligations with the assistance of actuarial firms.
Since there are many estimates and assumptions involved in recording insurance liabilities, and in the case of
workers’ compensation, a significant period of time before ultimate resolution of claims, differences between
actual future events and prior estimates and assumptions could result in adjustments to these liabilities.
Leases
We operate restaurants that are located on sites owned by us and sites leased by us from third parties. At
inception, each lease is evaluated to determine whether the lease will be accounted for as an operating or capital
lease based on lease terms. When determining the lease term, we include option periods for which failure to
renew the lease imposes a significant economic detriment. The primary penalty to which we may be subject is
the economic detriment associated with the existence of unamortized 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 on a straight line basis 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
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Wendy’s/Arby’s Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)