Wendy's 2010 Annual Report Download - page 94

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
Derivative Instruments
The Companies’ derivative instruments are recorded at fair value. Changes in the fair value of derivative
instruments that have been designated as fair value hedging instruments are recorded as an adjustment to the
underlying debt balance being hedged to the extent of the effectiveness of such hedging instruments. Changes in the
fair value of derivative instruments that have been designated as cash flow hedging instruments are included in the
“Unrealized gain (loss) on cash flow hedges” component of “Accumulated other comprehensive income (loss)” to the
extent of the effectiveness of such hedging instruments. Any ineffective portion of the change in fair value of the
designated hedging instruments is included in results of operations.
Share-Based Compensation
Wendy’s/Arby’s has granted share-based compensation to certain employees of Wendy’s/Arby’s Restaurants
under several equity plans of Wendy’s/Arby’s. Wendy’s/Arby’s Restaurants recognizes such share-based compensation
as capital contributions from Wendy’s/Arby’s. Wendy’s/Arby’s Restaurants has not granted any of its member
interests as share-based compensation.
The Companies measure the cost of employee services received in exchange for an award of equity instruments,
which include grants of employee stock options and restricted stock, based on the fair value of the award at the date of
grant. Share-based compensation expense is recognized net of estimated forfeitures, determined based on historical
experience. The Companies recognize compensation costs ratably over the requisite service period for each separately
vesting portion of the award unless the awards are subject to performance conditions, in which case they recognize
compensation expense over the requisite service period to the extent performance conditions are considered probable.
The Companies determine the grant-date fair value of stock options using a Black-Scholes-Merton option pricing
model (the “Black-Scholes Model”) unless the awards are subject to market conditions, in which case we use a Monte
Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the
probability that market conditions will be achieved.
Foreign Currency Translation
Substantially all of the Companies’ foreign operations are in Canada where the functional currency is the
Canadian dollar. Financial statements of foreign subsidiaries are prepared in their 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
The Companies 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, the Companies 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.
The Companies 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
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