Wendy's 2011 Annual Report Download - page 84

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
Share-Based Compensation
The Wendy’s Company has granted share-based compensation to certain employees of Wendy’s Restaurants
under several equity plans of The Wendy’s Company. Wendy’s Restaurants recognizes such share-based
compensation as capital contributions from The Wendy’s Company. Wendy’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 U.S. 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).” Gains and losses arising from the impact of foreign currency
exchange rate fluctuations on transactions in foreign currency are included in “General and administrative.”
Income Taxes
The Companies 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.
The Companies record uncertain tax positions on the basis of a two-step process 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.
Interest accrued for uncertain tax positions is charged to “Interest expense.” Penalties accrued for uncertain tax
positions are charged to “General and administrative.”
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