McDonalds 2011 Annual Report Download - page 32

Weighted-average assumptions
2011 2010 2009
Expected dividend yield 3.2% 3.5% 3.2%
Expected stock price volatility 21.5% 22.1% 24.4%
Risk-free interest rate 2.8% 2.8% 2.0%
Expected life of options In years 6.3 6.2 6.2
Fair value per option granted $12.18 $9.90 $9.66
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, with depreciation and
amortization provided using the straight-line method over the
following estimated useful lives: buildings–up to 40 years; lease-
hold improvements–the lesser of useful lives of assets or lease
terms, which generally include option periods; and equipment–
three to 12 years.
GOODWILL
Goodwill represents the excess of cost over the net tangible assets
and identifiable intangible assets of acquired restaurant businesses.
The Company’s goodwill primarily results from purchases of McDo-
nald’s restaurants from franchisees and ownership increases in
subsidiaries or affiliates, and it is generally assigned to the reporting
unit expected to benefit from the synergies of the combination. If a
Company-operated restaurant is sold within 24 months of acquis-
ition, the goodwill associated with the acquisition is written off in its
entirety. If a restaurant is sold beyond 24 months from the acquis-
ition, the amount of goodwill written off is based on the relative fair
value of the business sold compared to the reporting unit (defined
as each individual country).
The Company conducts goodwill impairment testing in the
fourth quarter of each year or whenever an indicator of impairment
exists. If an indicator of impairment exists (e.g., estimated earnings
multiple value of a reporting unit is less than its carrying value), the
goodwill impairment test compares the fair value of a reporting unit,
generally based on discounted future cash flows, with its carrying
amount including goodwill. If the carrying amount of a reporting unit
exceeds its fair value, an impairment loss is measured as the differ-
ence between the implied fair value of the reporting unit’s goodwill
and the carrying amount of goodwill. Historically, goodwill impair-
ment has not significantly impacted the consolidated financial
statements.
The following table presents the 2011 activity in goodwill by
segment:
In millions U.S. Europe APMEA(1) Other Countries & Corporate(2) Consolidated
Balance at December 31, 2010 $1,212.0 $785.5 $385.0 $203.6 $2,586.1
Net restaurant purchases (sales) 37.3 37.1 29.8 (4.6) 99.6
Ownership changes and other 5.1 (7.7) (3.0) (5.6)
Currency translation (21.0) (1.7) (4.2) (26.9)
Balance at December 31, 2011 $1,254.4 $801.6 $405.4 $191.8 $2,653.2
(1) APMEA represents Asia/Pacific, Middle East and Africa.
(2) Other Countries & Corporate represents Canada, Latin America and Corporate.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment annually in the fourth
quarter and whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For
purposes of annually reviewing McDonald’s restaurant assets for
potential impairment, assets are initially grouped together at a tele-
vision market level in the U.S. and at a country level for each of the
international markets. The Company manages its restaurants as a
group or portfolio with significant common costs and promotional
activities; as such, an individual restaurant’s cash flows are not
generally independent of the cash flows of others in a market. If an
indicator of impairment (e.g., negative operating cash flows for the
most recent trailing 24-month period) exists for any grouping of
assets, an estimate of undiscounted future cash flows produced by
each individual restaurant within the asset grouping is compared to
its carrying value. If an individual restaurant is determined to be
impaired, the loss is measured by the excess of the carrying amount
of the restaurant over its fair value as determined by an estimate of
discounted future cash flows.
Losses on assets held for disposal are recognized when
management and the Board of Directors, as required, have
approved and committed to a plan to dispose of the assets, the
assets are available for disposal, the disposal is probable of
occurring within 12 months, and the net sales proceeds are
expected to be less than its net book value, among other factors.
Generally, such losses relate to restaurants that have closed and
ceased operations as well as other assets that meet the criteria
to be considered “available for sale”.
FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at
fair value on a recurring basis, and certain non-financial assets
and liabilities on a nonrecurring basis. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a
liability in the principal or most advantageous market in an orderly
transaction between market participants on the measurement
date. Fair value disclosures are reflected in a three-level hier-
archy, maximizing the use of observable inputs and minimizing
the use of unobservable inputs.
The valuation hierarchy is based upon the transparency of
inputs to the valuation of an asset or liability on the measurement
date. The three levels are defined as follows:
• Level 1 – inputs to the valuation methodology are quoted
prices (unadjusted) for an identical asset or liability in an
active market.
• Level 2 – inputs to the valuation methodology include quoted
prices for a similar asset or liability in an active market or
model-derived valuations in which all significant inputs are
observable for substantially the full term of the asset or liability.
30 McDonald’s Corporation Annual Report 2011