Wendy's 2015 Annual Report Download - page 58

• 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” in Note 1 of the Financial Statements and Supplementary Data contained in
Item 8 for further information.
• 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 January 3, 2016 we have U.S. federal foreign tax credits of $20.8 million which will begin to expire in
2021. In addition, as of January 3, 2016 we have state net operating loss carryforwards of $944.3 million
which began expiring in 2016. 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 $17.1 million.
55