Wendy's 2011 Annual Report Download - page 61

• Impairment of long-lived assets:
Long-lived assets include our Wendy’s company-owned restaurant assets, their intangible assets, which
include trademarks, franchise agreements, favorable leases and reacquired rights under franchise
agreements, and certain prepaid assets.
As of January 1, 2012, the net carrying value of Wendy’s long-lived tangible and intangible assets were
$1,179.8 million and $1,286.3 million (which includes $903.0 million associated with Wendy’s
non-amortizing trademarks), respectively.
We review long-lived tangible and amortizing intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess the
recoverability of property and equipment and finite-lived other intangible assets by comparing the carrying
amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If the
carrying amount of the long-lived asset is not recoverable on an undiscounted cash flow basis, then
impairment is recognized to the extent that the carrying amount exceeds its fair value and is included in
“Impairment of long-lived assets.” Our critical estimates in this review process include the anticipated
future cash flows of each of Wendy’s company-owned restaurants used in assessing the recoverability of
their respective long-lived assets.
Non-amortizing intangible assets are tested for impairment at least annually by comparing their carrying
value to fair value; any excess of carrying value over fair value would represent impairment and a
corresponding charge would be recorded. Our critical estimates in the determination of the fair value of
the non-amortizing intangible assets include the anticipated future revenues of company-owned and
franchised restaurants and the resulting cash flows.
Our restaurant impairment losses principally reflect impairment charges resulting from the deterioration in
operating performance of certain company-owned restaurants. Those estimates are or were subject to
change as a result of many factors including, among others, any changes in our business plans, changing
economic conditions and the competitive environment. Should actual cash flows and our future estimates
vary adversely from those estimates we used, we may be required to recognize additional impairment
charges in future years.
• Realizability of deferred tax assets:
We account for income taxes under the asset and liability method. A deferred tax asset or liability is
recognized whenever there are (1) future tax effects from temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and (2) 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.
Deferred tax assets are recognized to the extent the Companies believe these assets will more likely than not
be realized. In evaluating the realizability of deferred tax assets, the Companies consider all available
positive and negative evidence, including the interaction and the timing of future reversals of existing
temporary differences, projected future taxable income, tax-planning strategies, and recent operating
results. When considered necessary, a valuation allowance is recorded to reduce the carrying amount of the
deferred tax assets to their anticipated realizable value.
Our evaluation of the realizability of our deferred tax assets is subject to change as a result of many factors
including, among others, any changes in our business plans, changing economic conditions, the
competitive environment and the effect of future tax legislation. Should future taxable income vary from
projected taxable income, we may be required to adjust our valuation allowance in future years.
• Federal and state income tax uncertainties:
We measure income tax uncertainties in accordance with a two-step process of evaluating a tax position.
We first determine if it is more likely than not that a tax position will be sustained upon examination
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
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