Wendy's 2014 Annual Report Download - page 54

amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill. The fair value of the
reporting unit is determined by management and is based on the results of (1) estimates we made
regarding the present value of the anticipated cash flows associated with each reporting unit (the “income
approach”) and (2) the indicated value of the reporting units based on a comparison and correlation of the
Company and other similar companies (the “market approach”).
The income approach, which considers factors unique to each of our reporting units and related long range
plans that may not be comparable to other companies and that are not yet publicly available, is dependent
on several critical management assumptions. These assumptions include estimates of future sales growth,
gross margins, operating costs, income tax rates, terminal value growth rates, capital expenditures and the
weighted average cost of capital (discount rate). Anticipated cash flows used under the income approach
are developed every fourth quarter in conjunction with our annual budgeting process and also incorporate
amounts and timing of future cash flows based on our long range plan.
The discount rates used in the income approach are an estimate of the rate of return that a market
participant would expect of each reporting unit. To select an appropriate rate for discounting the future
earnings stream, a review is made of short-term interest rate yields of long-term corporate and government
bonds, as well as the typical capital structure of companies in the industry. The discount rates used for
each reporting unit may vary depending on the risk inherent in the cash flow projections, as well as the risk
level that would be perceived by a market participant. A terminal value is included at the end of the
projection period used in our discounted cash flow analyses to reflect the remaining value that each
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 2014. Our assessment of
goodwill of our Wendy’s North America restaurants indicated that there had been no impairment and the
fair value of this reporting unit of $5,376.0 million was approximately 75% in excess of its carrying value.
Our indefinite-lived intangible assets represent trademarks and totaled $903.0 million as of
December 28, 2014. 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. We did not initially assess
our indefinite-lived intangibles for impairment using only qualitative factors in 2014 and, therefore, we
performed our test for impairment using a quantitative process. 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 2014,
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.
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