Wendy's 2014 Annual Report Download - page 72

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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
of carrying value over fair value is recognized as an impairment loss. Our estimates in the determination of the fair
value of indefinite-lived intangible assets include the anticipated future revenues of company-owned and franchised
restaurants and the resulting cash flows.
Investments
The Company has a 50% share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”)
with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the
Tim Hortons®brand. (Tim Hortons is a registered trademark of The TDL Marks Corporation.) The Company has
significant influence over the investee. Such investment is accounted for using the equity method, under which our
results of operations include our share of the income of the investee. Investments in limited partnerships and other
non-current investments in which the Company does not have significant influence over the investees, which includes
our indirect 18.5% interest in Arby’s Restaurant Group, Inc. (“Arby’s”), are recorded at cost with related realized
gains and losses reported as income or loss in the period in which the securities are sold or otherwise disposed. Cash
distributions and dividends received that are determined to be returns of capital are recorded as a reduction of the
carrying value of our investments.
The difference between the carrying value of our TimWen equity investment and the underlying equity in the
historical net assets of the investee is accounted for as if the investee were a consolidated subsidiary. Accordingly, the
carrying value difference is amortized over the estimated lives of the assets of the investee to which such difference
would have been allocated if the equity investment were a consolidated subsidiary. To the extent the carrying value
difference represents goodwill, it is not amortized.
Derivative Instruments
The Company enters into interest rate swap agreements to manage its exposure to changes in interest rates as
well as to maintain an appropriate mix of fixed and variable rate debt. Floating to fixed interest rate swap agreements
are accounted for as cash flow hedges. Changes in the fair value of our cash flow hedging instruments are recorded as
an adjustment to “Accumulated other comprehensive loss” to the extent of the effectiveness of such hedging
instruments and is subsequently reclassified into “Interest expense” in the period that the hedged forecasted
transaction affects earnings. Fixed to floating interest rate swap agreements are accounted for as fair value hedges.
Changes in the fair value of fair value hedging instruments are recorded as an adjustment to the underlying debt
balance being hedged to the extent of the effectiveness of such hedging instruments. Any ineffective portion of the
change in fair value of the designated hedging instruments is included in “Other income (expense), net.”
Share-Based Compensation
The Company has granted share-based compensation awards to certain employees under several equity plans.
The Company measures the cost of employee services received in exchange for an equity award, which include grants
of employee stock options and restricted shares, based on the fair value of the award at the date of grant. Share-based
compensation expense is recognized net of estimated forfeitures, determined based on historical experience. The
Company recognizes share-based compensation expense over the requisite service period unless the awards are subject
to performance conditions, in which case they recognize compensation expense over the requisite service period to the
extent performance conditions are considered probable. The Company determines the grant date fair value of stock
options using a Black-Scholes-Merton option pricing model (the “Black-Scholes Model”). The grant date fair value of
restricted share awards (“RSAs”), restricted share units (“RSUs”) and performance-based awards are determined using
the average of the high and low trading prices of our common stock on the date of grant, unless the awards are subject
to market conditions, in which case we use a Monte Carlo simulation model. The Monte Carlo simulation model
utilizes multiple input variables to estimate the probability that market conditions will be achieved.
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