| Significant Accounting Policies | Note 2. Significant Accounting Policies
Basis of Presentation
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States
(“GAAP”) and related rules and regulations of the U.S.
Securities and Exchange Commission requires our management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities. Actual results
could differ from these estimates.
Fiscal Year
We operate on a monthly calendar, with a fiscal year that ends on
December 31. Prior to December 31, 2015, the fiscal year of
our Tim Hortons subsidiaries ended on the Sunday nearest to
December 31, which was December 28 in 2014. The effect of
changing the fiscal year of our Tim Hortons subsidiaries during
2015 did not have a material impact on our consolidated results of
operations, financial position or cash flows.
Principles of Consolidation
The consolidated financial statements include our accounts and the
accounts of entities in which we have a controlling financial
interest, the usual condition of which is ownership of a majority
voting interest. All material intercompany balances and
transactions have been eliminated in consolidation. Investments in
other affiliates that are owned 50% or less where we have
significant influence are accounted for by the equity method.
We are the sole general partner of Partnership and, as such we have
the exclusive right, power and authority to manage, control,
administer and operate the business and affairs and to make
decisions regarding the undertaking and business of Partnership,
subject to the terms of the partnership agreement and applicable
laws. As a result, we consolidate the results of Partnership and
record a noncontrolling interest in our consolidated balance sheets
and statements of operations with respect to the remaining economic
interest in Partnership we do not hold.
We also consider for consolidation entities in which we have
certain interests, where the controlling financial interest may be
achieved through arrangements that do not involve voting interests.
Such an entity, known as a variable interest entity
(“VIE”), is required to be consolidated by its primary
beneficiary. The primary beneficiary is the entity that possesses
the power to direct the activities of the VIE that most
significantly impact its economic performance and has the
obligation to absorb losses or the right to receive benefits from
the VIE that are significant to it. Our maximum exposure to loss
resulting from involvement with VIEs is attributable to accounts
and notes receivable balances, outstanding loan guarantees and
future lease payments, where applicable.
Tim Hortons has historically entered into certain arrangements in
which an operator acquires the right to operate a restaurant, but
Tim Hortons owns the restaurant’s assets. In these
arrangements, Tim Hortons has the ability to determine which
operators manage the restaurants and for what duration. We perform
an analysis to determine if the legal entity in which operations
are conducted is a VIE and consolidate a VIE entity if we also
determine Tim Hortons is the entity’s primary beneficiary
(“Restaurant VIEs”). As Burger King franchise and
master franchise arrangements provide the franchise and master
franchise entities the power to direct the activities that most
significantly impact their economic performance, we do not consider
ourselves the primary beneficiary of any such entity that might be
a VIE.
As of December 31, 2016 and 2015, we determined that we are
the primary beneficiary of 96 and 141 Restaurant VIEs,
respectively, and accordingly, have consolidated the financial
results of operations, assets and liabilities, and cash flows of
these Restaurant VIEs in the Company’s consolidated financial
statements. Material intercompany accounts and transactions have
been eliminated in consolidation.
Assets and liabilities related to consolidated VIEs are not
significant to our total consolidated assets and liabilities.
Liabilities recognized as a result of consolidating these VIEs do
not necessarily represent additional claims on our general assets;
rather, they represent claims against the specific assets of the
consolidated VIEs. Conversely, assets recognized as a result of
consolidating these VIEs do not represent additional assets that
could be used to satisfy claims by our creditors as they are not
legally included within our general assets.
Reclassifications
Certain prior year amounts in the accompanying consolidated
financial statements and notes to the consolidated financial
statements have been reclassified in order to be comparable with
the current year classifications. These reclassifications had no
effect on previously reported net income.
Foreign Currency Translation and Transaction Gains and
Losses
Our functional currency is the U.S. dollar, since our redeemable
preferred shares (see Note 12, Redeemable Preferred Shares end-of-period
For any transaction that is denominated in a currency different
from the entity’s functional currency, we record a gain or
loss based on the difference between the foreign exchange rate at
the transaction date and the foreign exchange rate at the
transaction settlement date (or rate at period end, if unsettled)
which is included within other operating expenses (income), net in
the consolidated statements of operations.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three
months or less and credit card receivables are considered cash
equivalents.
Inventories
Inventories are carried at the lower of cost or net realizable
value and consist primarily of raw materials such as green coffee
beans and finished goods such as new equipment, parts, paper
supplies and restaurant food items. The moving average method
is used to determine the cost of raw material and finished goods
inventories held for sale to Tim Hortons franchisees.
Property and Equipment, net
We record property and equipment at historical cost less
accumulated depreciation and amortization, which is recognized
using the straight-line method over the following estimated useful
lives: (i) buildings and improvements – up to 40 years;
(ii) restaurant equipment – up to 18 years;
(iii) furniture, fixtures and other – up to 10 years;
(iv) manufacturing equipment – up to 30 years; and
(v) capital leases – up to 40 years or lease term.
Leasehold improvements to properties where we are the lessee are
amortized over the lesser of the remaining term of the lease or the
estimated useful life of the improvement.
We are considered to be the owner of certain restaurants leased
from unrelated lessors because Tim Hortons constructed some of the
structural elements of those restaurants. Accordingly,
lessors’ contributions to the construction costs of these
restaurants was recognized as other debt, and was
$83.2 million and $85.2 million at December 31, 2016
and 2015, respectively.
Major improvements are capitalized, while maintenance and repairs
are expensed when incurred.
Leases
We define lease term as the initial term of a lease plus any
renewals covered by bargain renewal options or that are reasonably
assured of exercise because non-renewal
Assets we acquire as lessee under capital leases are stated at the
lower of the present value of future minimum lease payments or fair
market value at the date of inception of the lease. Capital lease
assets are depreciated using the straight-line method over the
shorter of the useful life of the asset or the underlying lease
term.
We also have net investments in properties leased to franchisees,
which meet the criteria of direct financing leases. Investments in
direct financing leases are recorded on a net basis, consisting of
the gross investment and residual value in the lease, less unearned
income. Earned income on direct financing leases is recognized when
earned and collectability is reasonably assured. Unearned income is
recognized over the lease term yielding a constant periodic rate of
return on the net investment in the lease. Direct financing leases
are reviewed for impairment whenever events or circumstances
indicate that the carrying amount of the asset may not be
recoverable based on the payment history under the lease.
We have recorded favorable and unfavorable operating leases in
connection with the acquisition method of accounting. We amortize
favorable and unfavorable leases on a straight-line basis over the
remaining term of the leases, as determined at the acquisition
date.
Goodwill and Intangible Assets Not Subject to
Amortization
Goodwill represents the excess of the purchase price over the fair
value of assets acquired and liabilities assumed in connection with
the Transactions and the 2010 acquisition of Burger King Holdings,
Inc. by 3G Capital Partners Ltd. Our indefinite-lived intangible
assets consist of the Tim Hortons Burger
King two-step
Under a qualitative approach, our impairment review for goodwill
consists of an assessment of whether it is more-likely-than-not more-likely-than-not two-step
Under a qualitative approach, our impairment review for the Brands
consists of an assessment of whether it is more-likely-than-not more-likely-than-not
We completed our impairment tests for goodwill and the Brands as of
October 1, 2016, 2015 and 2014 and no impairment resulted.
Long-Lived Assets
Long-lived assets, such as property and equipment and intangible
assets subject to amortization, are tested for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Some of the events or
changes in circumstances that would trigger an impairment review
include, but are not limited to, bankruptcy proceedings or other
significant financial distress of a lessee; significant negative
industry or economic trends; knowledge of transactions involving
the sale of similar property at amounts below the carrying value;
or our expectation to dispose of long-lived assets before the end
of their estimated useful lives. The impairment test for long-lived
assets requires us to assess the recoverability of long-lived
assets by comparing their net carrying value to the sum of
undiscounted estimated future cash flows directly associated with
and arising from use and eventual disposition of the assets.
Long-lived assets are grouped for recognition and measurement of
impairment at the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets. If the
net carrying value of a group of long-lived assets exceeds the sum
of related undiscounted estimated future cash flows, we record an
impairment charge equal to the excess, if any, of the net carrying
value over fair value.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) (“OCI”) refers to
revenues, expenses, gains and losses that are included in
comprehensive income (loss), but are excluded from net income
(loss) as these amounts are recorded directly as an adjustment to
shareholders’ equity, net of tax. Our other comprehensive
income (loss) is comprised of unrealized gains and losses on
foreign currency translation adjustments, unrealized gains and
losses on hedging activity, net of tax, and minimum pension
liability adjustments, net of tax.
Derivative Financial Instruments
We recognize and measure all derivative instruments as either
assets or liabilities at fair value in the consolidated balance
sheets. We may enter into derivatives that are not initially
designated as hedging instruments for accounting purposes, but
which largely offset the economic impact of certain
transactions.
Gains or losses resulting from changes in the fair value of
derivatives are recognized in earnings or recorded in other
comprehensive income (loss) and recognized in the consolidated
statements of operations when the hedged item affects earnings,
depending on the purpose of the derivatives and whether they
qualify for, and we have applied, hedge accounting treatment. The
ineffective portion of gains or losses on derivatives is reported
in current earnings.
When applying hedge accounting, we designate at a
derivative’s inception, the specific assets, liabilities or
future commitments being hedged, and to assess the hedge’s
effectiveness at inception and on an ongoing basis. We discontinue
hedge accounting when: (i) we determine that the cash flow
derivative is no longer effective in offsetting changes in the cash
flows of a hedged item; (ii) the derivative expires or is
sold, terminated or exercised; (iii) it is no longer probable
that the forecasted transaction will occur; or (iv) management
determines that designation of the derivatives as a hedge
instrument is no longer appropriate. We do not enter into or hold
derivatives for speculative purposes.
Disclosures about Fair Value
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants in the principal market, or if none
exists, the most advantageous market, for the specific asset or
liability at the measurement date (the exit price). The fair value
is based on assumptions that market participants would use when
pricing the asset or liability. The fair values are assigned a
level within the fair value hierarchy, depending on the source of
the inputs into the calculation, as follows:
Level 1
Level 2
Level 3
The carrying amounts for cash and equivalents, accounts and notes
receivable and accounts and drafts payable approximate fair value
based on the short-term nature of these amounts.
We carry all of our derivatives at fair value and value them using
various pricing models or discounted cash flow analyses that
incorporate observable market parameters, such as interest rate
yield curves and currency rates, which are Level 2 inputs.
Derivative valuations incorporate credit risk adjustments that are
necessary to reflect the probability of default by the counterparty
or us. For disclosures about the fair value measurements of our
derivative instruments, see Note 11, Derivatives
The fair value of variable rate term debt is estimated using inputs
based on bid and offer prices that are Level 2 inputs and was
$8.77 billion and $8.67 billion at December 31, 2016
and 2015, respectively, compared to a principal carrying amount of
$8.59 billion on the same dates.
The determinations of fair values of certain tangible and
intangible assets for purposes of the application of the
acquisition method of accounting to the acquisition of Tim Hortons
were based upon Level 3 inputs. The determination of fair
values of our reporting units and the determination of the fair
value of the Brands for impairment testing using a quantitative
approach during 2016 and 2015 were based upon Level 3
inputs.
Revenue Recognition
Sales include supply chain sales and sales from Company
restaurants, which are presented net of any related sales tax.
Supply chain sales represent sales of products, supplies and
restaurant equipment, other than equipment sales related to initial
restaurant establishment or renovations that are shipped directly
from our warehouses or by third-party distributors to restaurants
or retailers, as well as sales to retailers. Revenues from supply
chain sales are recognized upon delivery. Sales at Company
restaurants (including Restaurant VIEs) represent restaurant-level
sales to our guests and are recognized at the point of sale.
Franchise and property revenues include franchise revenues,
consisting primarily of royalties, initial and renewal franchise
fees paid by franchisees, revenues derived from equipment sales at
establishment of a restaurant and in connection with a restaurant
renewal or renovation, and property revenues from properties we
lease or sublease to franchisees.
Royalties are based on a percentage of gross sales at franchise
restaurants and are recognized when earned and collectability is
reasonably assured. Initial franchise fees and equipment sales are
recognized as revenue when the related restaurant begins operations
and our completion of all material services and conditions. Fees
collected in advance are deferred until earned. Renewal franchise
fees are recognized as revenue upon receipt of the non-refundable
Deferred Financing Costs
Deferred financing costs are amortized over the term of the related
debt agreement into interest expense using the effective interest
method.
Advertising and Promotional Costs
Company restaurants and franchise restaurants contribute to
advertising funds that our subsidiaries manage in the United States
and Canada and certain other international markets. The advertising
funds expense the production costs of advertising when the
advertisements are first aired or displayed. All other advertising
and promotional costs are expensed in the period incurred. Under
our franchise agreements, advertising contributions received from
franchisees must be spent on advertising, product development,
marketing and related activities. Since we act as an agent for
these specifically designated contributions, the revenues and
expenses of the advertising funds are generally netted in our
consolidated statements of operations.
Advertising expense, which primarily consists of advertising
contributions by Company restaurants (including Restaurant VIEs)
based on a percentage of gross sales, totaled $5.5 million for
2016, $13.7 million for 2015, and $2.4 million for 2014
and is included in selling, general and administrative expenses in
the accompanying consolidated statements of operations.
Income Taxes
Amounts in the financial statements related to income taxes are
calculated using the principles of Accounting Standards
Codification (“ASC”) 740, Income Taxes more-likely-than-not more-likely-than-not
Income tax benefits credited to equity relate to tax benefits
associated with amounts that are deductible for income tax purposes
but do not affect earnings. These benefits are principally
generated from employee exercises of nonqualified stock options and
settlement of restricted stock awards.
We recognize positions taken or expected to be taken in a tax
return in the financial statements when it is more-likely-than-not
Translation gains and losses resulting from the remeasurement of
foreign deferred tax assets or liabilities denominated in a
currency other than the functional currency are classified as other
operating expenses (income), net in the consolidated statements of
operations.
Share-based Compensation
Compensation expense related to the issuance of share-based awards
to our employees is measured at fair value on the grant date. We
use the Black-Scholes option pricing model to value stock options.
The compensation expense for awards that vest over a future service
period is recognized over the requisite service period on a
straight-line basis, adjusted for estimated forfeitures of awards
that are not expected to vest. The compensation expense for awards
that do not require future service is recognized immediately. Upon
the end of the service period, compensation expense is adjusted to
account for the actual forfeiture rate. Cash settled share-based
awards are classified as liabilities and are re-measured
Restructuring
The determination of when we accrue for employee involuntary
termination benefits depends on whether the termination benefits
are provided under an on-going one-time Nonretirement Postemployment
Benefits one-time Exit or Disposal Cost
Obligations
New Accounting Pronouncements
Revenue Recognition
We have performed a preliminary analysis of the impact of the new
revenue recognition guidance and developed a comprehensive plan to
guide the implementation. The project plan includes analyzing the
impact on our current revenue streams, comparing our historical
accounting policies to the new guidance, and identifying potential
differences from applying the requirements of the new guidance to
our contracts. Under current accounting guidance, we recognize
initial franchise fees when we have performed all material
obligations and services, which generally occurs when the
franchised restaurant opens. Under the new guidance, we anticipate
deferring the initial franchise fees and recognizing revenue over
the term of the related franchise agreement. We anticipate that the
new guidance will also change our reporting of advertising fund
contributions from franchisees and the related advertising
expenditures, which are currently reported on a net basis in our
consolidated statements of operations. Under the current guidance,
as of the balance sheet date, advertising fund contributions
received may not equal advertising expenditures for the period due
to the timing of promotions. To the extent that contributions
received exceeded advertising expenditures, the excess
contributions are treated as a deferred liability. To the extent
that advertising expenditures temporarily exceeded advertising fund
contributions, the difference is recorded as a receivable from the
fund. Under the new guidance, we anticipate advertising fund
contributions from franchisees and advertising fund expenditures
will be reported on a gross basis and the related advertising fund
revenues and expenses may be reported in different periods.
We anticipate that estimated breakage income on gift cards will be
recognized as gift cards are utilized instead of our current policy
of deferring the breakage income until it is deemed remote the
unused gift card balance will be redeemed. We do not believe this
guidance will materially impact our recognition of revenue from
Company restaurant sales, our recognition of royalty revenues from
franchisees, or our recognition of revenues from property rentals.
We are continuing to evaluate the impact the adoption of this
guidance will have on the recognition of revenue from other
sources.
Lease Accounting non-cash
Derivative Contract Novations on Existing Hedges de-designation
Equity Method Accounting
Employee Share-Based Payment Accounting paid-in
Classification of Certain Cash Receipts and Cash Payments
Intra-Entity Transfers of Assets Other Than Inventory
Goodwill Impairment two-step more-likely-than-not |
