Wendy's 2012 Annual Report Download - page 54

reporting unit is expected to generate. The terminal value represents the present value in the last year of the
projection period of all subsequent cash flows into perpetuity. The terminal value growth rate is a key
assumption used in determining the terminal value as it represents the annual growth of all subsequent
cash flows into perpetuity.
Under the market approach, we apply the guideline company method in estimating fair value. The
guideline company method makes use of market price data of corporations whose stock is actively traded
in a public market. The corporations we selected as guideline companies are engaged in a similar line of
business or are subject to similar financial and business risks, including the opportunity for growth. The
guideline company method of the market approach provides an indication of value by relating the equity
or invested capital (debt plus equity) of guideline companies to various measures of their earnings and cash
flow, then applying such multiples to the business being valued. The result of applying the guideline
company approach is adjusted based on the incremental value associated with a controlling interest in the
business. This “control premium” represents the amount a new controlling shareholder would pay for the
benefits resulting from synergies and other potential benefits derived from controlling the enterprise.
We performed our annual goodwill impairment test in the fourth quarter of 2012. Our assessment of
goodwill of our Wendy’s North America restaurants indicated that there had been no impairment and that
the fair value of this reporting unit of $3,426 million was approximately 15% in excess of its carrying value.
Our indefinite-lived intangible assets represent trademarks and totaled $903.0 million as of December 30,
2012. We test indefinite-lived intangible assets for impairment annually, or more frequently if events or
changes in circumstances indicate that the assets may be impaired. In the third quarter of 2012, we
adopted a new accounting pronouncement, which permits a company to make an qualitative assessment of
whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for
determining whether it is necessary to perform the quantitative impairment test. However, we determined
that we were required to perform the quantitative assessment in 2012. Our quantitative process includes
comparing the carrying value to the fair value of our indefinite-lived intangible assets, with any excess
recognized as an impairment loss. Our critical estimates in the determination of the fair value of our
indefinite-lived intangible assets include the anticipated future revenues of company-owned and franchised
restaurants and the resulting cash flows.
We performed our annual indefinite-lived intangible asset impairment test in the fourth quarter of 2012,
which indicated that there had been no impairment.
The estimated fair values of our goodwill reporting units and indefinite-lived intangible assets are 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 use, we may be required to recognize impairment charges in future years.
• Impairment of long-lived assets:
For impairment testing purposes, long-lived assets include our company-owned restaurant assets and their
definite-lived intangible assets, which include franchise agreements, favorable leases and reacquired rights
under franchise agreements.
As of December 30, 2012, the net carrying value of our long-lived tangible and definite-lived intangible
assets were $1,250.3 million and $398.5 million, respectively.
We review our long-lived 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 our long-lived
assets by comparing the carrying amount of the asset group to future undiscounted net cash flows expected
to be generated by our individual company-owned restaurants. If the carrying amount of the long-lived
asset group 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
company-owned restaurant used in assessing the recoverability of their respective long-lived assets.
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
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