Wendy's 2012 Annual Report Download - page 55

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 Company believes these assets will more likely than not
be realized. In evaluating the realizability of deferred tax assets, the Company considers all available
positive and negative evidence, including the interaction and the timing of future reversals of existing
temporary differences, recent operating results, tax-planning strategies, and projected future taxable
income. In projecting future taxable income, we begin with historical results adjusted for the results of
discontinued operations and incorporate assumptions including future operating income, the reversal of
temporary differences and the implementation of feasible and prudent tax planning strategies. These
assumptions require significant judgment and are consistent with the plans and estimates we are using to
manage our underlying business. In evaluating the objective evidence that historical results provide, we
consider three years of cumulative operating income (loss).
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.
At December 30, 2012 we have federal net operating losses of $306.5 million which will expire beginning
2025. Tax credits of $91.3 million at December 30, 2012, principally consisting of foreign tax credits and
jobs credits, expire beginning in 2015. State net operating losses are subject to various limitations
including carryforward periods and begin expiring in 2013. We believe it is more likely than not that the
benefit from certain state net operating loss carryforwards will not be realized. In recognition of this risk,
we have provided a valuation allowance of $21.1 million.
• 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
amount that has a greater than fifty percent likelihood of being realized upon effective settlement. We have
unrecognized tax benefits of $28.8 million, which if resolved favorably would reduce our tax expense by
$20.4 million at December 30, 2012.
We recognize interest accrued related to uncertain tax positions in “Interest expense” and penalties in
“General and administrative.” At December 30, 2012, we had $4.0 million accrued for interest and
$1.7 million accrued for penalties.
The Company participates in the Internal Revenue Service (the “IRS”) Compliance Assurance Process
(“CAP”). As part of CAP, tax years are examined on a contemporaneous basis so that all or most issues are
resolved prior to the filing of the tax return. As such, our January 3, 2010, January 2, 2011 and January 1,
2012 tax returns have been settled. Certain of our state income tax returns from our 2001 fiscal year and
forward remain subject to examination. We believe that adequate provisions have been made for any
liabilities, including interest and penalties, that may result from the completion of these examinations.
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