Wendy's 2010 Annual Report Download - page 96

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)
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
initially for 20 years and, in most cases, provide for rent escalations and renewal options. The term used for Straight-
Line Rent expense is calculated initially from the date we obtain possession of the leased premises through the
expected lease termination date. 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 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, when we purchase restaurants, are recorded as components of “Other
intangible assets” and “Other liabilities,” respectively, 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 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 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 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. Different amounts of depreciation and amortization, interest and rent expense would be
reported if different estimates and assumptions were used.
(2) Acquisitions and Dispositions
Merger with Wendy’s International, Inc.
On September 29, 2008, Wendy’s/Arby’s completed the Wendy’s Merger in an all-stock transaction in which
Wendy’s shareholders received a fixed ratio of 4.25 shares of Wendy’s/Arby’s Class A common stock for each share of
Wendy’s common stock owned.
The merger was accounted for using the purchase method of accounting and Wendy’s/Arby’s concluded that it
was the acquirer for financial accounting purposes. The total merger consideration was allocated to Wendy’s net
tangible and intangible assets acquired and liabilities assumed based on their fair values with the excess recognized as
goodwill of which $42,282 is deductible for tax purposes. The total consideration included merger related costs in
accordance with the applicable guidance effective as of the Closing Date.
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