Wendy's 2013 Annual Report Download - page 76

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
Advertising Costs
The Company incurs 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
The Company is self-insured for most workers’ compensation losses and health care claims and purchases
insurance for general liability and automotive liability losses, all subject to a $500 per occurrence retention or
deductible limit. The Company provides 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 our 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
The Company operates 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.
For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as
rent expense on a straight line basis (“Straight-Line Rent”) over the applicable lease terms. Lease terms are generally
initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. The term used
for Straight-Line Rent is calculated initially from the date we obtain possession of the leased premises through the
expected lease termination date. We expense rent from the possession date to the restaurant opening date. There is a
period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the
possession date and ends on the rent commencement date. During a Rent Holiday, no cash rent payments are
typically due under the terms of the lease; however, expense is recorded for that period on a straight-line basis
consistent with the Straight-Line Rent method.
For leases that contain rent escalations, we record the rent payable during the lease term, as determined above,
on the straight-line basis over the term of the lease (including the Rent Holiday beginning upon possession of the
premises), and record the excess of the Straight-Line Rent over the minimum rents paid as a deferred lease liability
included in “Other liabilities.” Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”),
that require additional rental payments based upon restaurant sales volume. Contingent Rent is expensed each period
as the liability is incurred.
Favorable and unfavorable lease amounts are recorded as components of “Other intangible assets” and “Other
liabilities,” respectively. Favorable and unfavorable lease amounts are amortized on a straight-line basis over the
remaining term of the leases. Such amortization is recognized in the consolidated statements of operations based on
the nature of the underlying lease; Favorable and unfavorable lease amounts related to leases for company-owned
restaurants, sold or closed restaurants, leased and/or subleased properties and corporate offices are amortized to “Cost
of sales,” “Other operating expense, net,” “Franchise revenues” and “General and administrative,” respectively. When
the expected term of a lease is determined to be shorter than the original amortization period, the favorable or
unfavorable lease balance associated with the lease is adjusted to reflect the revised lease term.
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