Wendy's 2011 Annual Report Download - page 85

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)
Revenue Recognition
“Sales” includes revenues recognized upon delivery of food to the customer at company-owned restaurants and
revenues for shipments of bakery items and kids’ meal promotional items to our franchisees and others. During the
first quarter of 2011, Wendy’s purchasing cooperative, Quality Supply Chain Co-op, Inc. (“QSCC”) began managing
the operations for kids’ meal promotion items sold to franchisees. Our sales of kids’ meal promotion items during
2011 were made from inventory on hand prior to QSCC’s management of this process. “Sales” excludes sales taxes
collected from the Companies’ customers.
“Franchise revenues” includes royalties, franchise fees, and rental income. Royalties from franchised restaurants
are based on a percentage of net sales of the franchised restaurant and are recognized as earned. Initial franchise fees
are recorded as deferred income when received and are recognized as revenue when a franchised restaurant is opened
as all material services and conditions related to the franchise fee have been substantially performed upon the
restaurant opening. Renewal franchise fees are recognized as revenue when the license agreements are signed and the
fee is paid since there are no material services and conditions related to the renewal franchise fee. Franchise
commitment fee deposits are forfeited and recognized as revenue upon the termination of the related commitments to
open new franchised restaurants. Rental income from locations owned by the Companies and leased to franchisees is
recognized on a straight-line basis over the respective operating lease terms.
Cost of Sales
Cost of sales includes food and paper, restaurant labor, and occupancy, advertising and other operating costs.
Vendor Incentives
The Companies receive incentives from certain vendors. These incentives are recognized as earned and are
generally classified as a reduction of “Cost of sales.”
Advertising Costs
The Companies incur 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 workers’ compensation, health care claims, general liability and automotive
liability losses. We provide for their 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 elapses before the 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 its 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.
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