Wendy's 2014 Annual Report Download - page 73

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
Foreign Currency Translation
Substantially all of the Company’s foreign operations are in Canada where the functional currency is the
Canadian dollar. Financial statements of foreign subsidiaries are prepared in their functional currency and then
translated into U.S. dollars. Assets and liabilities are translated at the exchange rate as of the balance sheet date and
revenues, costs and expenses are translated at a monthly average exchange rate. Net gains or losses resulting from the
translation adjustment are recorded to the “Foreign currency translation adjustment” component of “Accumulated
other comprehensive loss.” Gains and losses arising from the impact of foreign currency exchange rate fluctuations on
transactions in foreign currency are included in “General and administrative.”
Income Taxes
The Company accounts 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, projected
future taxable income, recent operating results and tax-planning strategies. When considered necessary, a valuation
allowance is recorded to reduce the carrying amount of the deferred tax assets to their anticipated realizable value.
The Company records uncertain tax positions on the basis of a two-step process whereby we first determine if it
is more likely than not that a tax position will be sustained upon examination, including resolution of any related
appeals or litigation processes, 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 of benefit that is greater than 50% likely of being realized upon being effectively settled.
Interest accrued for uncertain tax positions is charged to “Interest expense.” Penalties accrued for uncertain tax
positions are charged to “General and administrative.”
Restaurant Dispositions
In connection with the sale of company-owned restaurants to franchisees, the Company typically enters into
several agreements, in addition to an asset purchase agreement, with franchisees including franchise, development,
relationship and lease agreements. See “Franchised Restaurants” in Item 1 herein, for further information regarding
these agreements. The Company typically sells restaurants’ cash, inventory and equipment and retains ownership or
the leasehold interest to the real estate to lease and/or sublease to the franchisee. The Company has determined that
its restaurant dispositions usually represent multiple-element arrangements, and as such, the cash consideration
received is allocated to the separate elements based on their relative selling price. Cash consideration generally includes
up-front consideration for the sale of the restaurants, technical assistance fees and development fees and future cash
consideration for royalties and lease payments. The Company considers the future lease payments in allocating the
initial cash consideration received. The Company obtains third-party evidence to estimate the relative selling price of
the stated rent under the lease and/or sublease agreements which is primarily based upon comparable market rents.
Based on the Company’s review of the third-party evidence, the Company records favorable or unfavorable lease
assets/liabilities with a corresponding offset to the gain or loss on the sale of the restaurants. The cash consideration
per restaurant for technical assistance fees and development fees is consistent with the amounts stated in the related
franchise agreements which are charged for separate standalone arrangements. Therefore, the Company recognizes the
technical assistance and development fees when earned. Future royalty income is also recognized in revenue as earned.
See “Revenue Recognition” below further information.
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