Wendy's 2014 Annual Report Download - page 56

• Our ability to realize 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 from continuing 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.
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.
Net operating loss and credit carryforwards are subject to various limitations and carryforward periods. As
of December 28, 2014 we have U.S. federal tax credits of $90.1 million, principally consisting of foreign
tax credits and jobs credits which will begin to expire in 2018. In addition, as of December 28, 2014 we
have state net operating loss carryforwards of $1,087.3 million which began expiring in 2015. We believe
it is more likely than not that the benefit from certain state net operating loss carryforwards and foreign tax
credits will not be realized. In recognition of this risk, we have provided a valuation allowance of
$11.2 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 50% likelihood of being realized upon effective settlement. We have
unrecognized tax benefits of $25.7 million, which if resolved favorably would reduce our tax expense by
$18.8 million at December 28, 2014.
In January 2014, the Company adopted the Financial Accounting Standards Board amendment requiring
unrecognized tax benefits to be presented as a reduction to deferred tax assets when a net operating loss
carryforward, a similar tax loss or a tax credit carryforward exists. The adoption of this amendment
resulted in a reduction of $6.2 million in the liability for unrecognized tax benefits and a corresponding
increase to net non-current deferred income tax liabilities during 2014.
We accrue interest related to uncertain tax positions in “Interest expense” and penalties in “General and
administrative.” At December 28, 2014, we had $2.9 million accrued for interest and $0.7 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 tax returns for fiscal years 2009 through 2013
have been settled. Certain of the Company’s state income tax returns from its 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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