Wendy's 2014 Annual Report Download - page 75

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
detriment. For properties used to operate company-owned restaurants, the primary economic detriment relates to the
existence of unamortized leasehold improvements which might be impaired if we choose not to exercise the available
renewal options. The lease term for properties leased or subleased to franchisees, is determined based upon the
economic detriment to the franchisee and includes consideration of the length of the franchise agreement, historical
performance of the restaurant and the existence of bargain renewal options.
For operating leases, minimum lease payments or receipts, including minimum scheduled rent increases, are
recognized as rent expense or income, as applicable, 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 of possession of the
leased premises through the expected lease termination date. We recognize rent expense or income, as applicable, 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 or
income, as applicable, is recorded for that period on a straight-line basis.
For leases that contain rent escalations, we record the rent payable or receivable, as applicable, 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 or
received as a deferred lease liability or asset which is included in “Other liabilities” or “Other assets,” as applicable.
Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental
payments based upon restaurant sales volume. Contingent Rent is recognized each period as the liability is incurred or
the asset is earned.
For direct financing leases, the Company records its investment in properties leased to franchisees on a net
basis, which is comprised of its gross investment less unearned income. The current and long-term portions of our net
investment in direct financing leases are included in “Accounts and notes receivable” and “Other assets,” respectively.
Unearned income is recognized as interest income over the lease term and is included in “Interest expense.”
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 term
of the leases. 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.
Lease expense, rental income and favorable and unfavorable lease amortization is recognized in the consolidated
statements of operations based on the nature of the underlying lease. Amounts related to leases for company-owned
restaurants are recorded to “Cost of sales.” Lease expense, including any related amortization, for leased properties that
are subsequently subleased to franchisees is recorded to “Other operating expense, net.” Rental income, including any
related amortization, for owned and subleased properties to franchisees is recorded to “Franchise revenues.” Amounts
related to leases for corporate offices and equipment are recorded to “General and administrative.”
Management makes certain estimates and assumptions regarding each new lease and sublease agreement,
renewal and amendment, including, but not limited to, property values, market rents, property lives, discount rates
and probable term, all of which can impact (1) the classification and accounting for a lease or sublease as operating or
capital, including direct financing, (2) the Rent Holiday and escalations in payment that are taken into consideration
when calculating Straight-Line Rent, (3) the term over which leasehold improvements for each restaurant are
amortized and (4) the values and lives of favorable and unfavorable leases. The amount of depreciation and
amortization, interest and rent expense and income reported would vary if different estimates and assumptions were
used.
Concentration of Risk
Wendy’s had no customers which accounted for 10% or more of consolidated revenues in 2014, 2013 or 2012.
As of December 28, 2014, Wendy’s had one main in-line distributor of food, packaging and beverage products,
excluding produce and breads, that serviced approximately 57% of its company-owned and franchised restaurants and
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