Fair Value Measurements

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 at the measurement date. Valuation techniques under the accounting guidance related to fair value measurements are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. These inputs are classified into the following hierarchy:


•	Level 1 Inputs - Quoted prices for identical assets or liabilities in active markets.


•	Level 2 Inputs - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.


•	Level 3 Inputs - Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.

Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:



	December 31, 2017				January 1, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Fair Value Measurements
Financial assets
Cash equivalents	$	338	$	338	$	5,335	$	5,335	Level 1
Non-current cost method investments (a)	639		327,710		2,436		326,283		Level 3

Financial liabilities
Series 2015-1 Class A-2-I Notes (b)	855,313		856,510		864,063		857,349		Level 2
Series 2015-1 Class A-2-II Notes (b)	879,750		897,961		888,750		880,005		Level 2
Series 2015-1 Class A-2-III Notes (b)	488,750		513,188		493,750		474,543		Level 2
7% debentures, due in 2025 (b)	89,514		107,000		88,277		99,750		Level 2
Guarantees of franchisee loan obligations (c)	37		37		280		280		Level 3

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(a)

The fair value of our indirect investment in Arby’s is based on applying a multiple to Arby’s adjusted earnings before income taxes, depreciation and amortization per its current unaudited financial information. The carrying value of our indirect investment in Arby’s was reduced to zero during 2013 in connection with the receipt of a dividend. See Note 7 for more information. The fair values of our remaining investments are not significant and are based on our review of information provided by the investment managers or investees which was based on (1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for similar investments and (3) quoted market or broker/dealer prices adjusted by the investment managers for legal or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying investments.


(b)	The fair values were based on quoted market prices in markets that are not considered active markets.

(c)

Wendy’s has provided loan guarantees to various lenders on behalf of franchisees entering into debt arrangements for new restaurant development and equipment financing. In addition during 2012, Wendy’s provided a guarantee to a lender for a franchisee in connection with the refinancing of the franchisee’s debt. Wendy’s was released from this guarantee during the fourth quarter of 2017. We have accrued a liability for the fair value of these guarantees, the calculation of which was based upon a weighted average risk percentage established at inception adjusted for a history of defaults.

The carrying amounts of cash, accounts payable and accrued expenses approximated fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximated fair value due to the effect of the related allowance for doubtful accounts. Our cash and cash equivalents and guarantees are the only financial assets and liabilities measured and recorded at fair value on a recurring basis.

Derivative Instruments

The Company’s primary objective for entering into interest rate swap agreements was to manage its exposure to changes in interest rates, as well as to maintain an appropriate mix of fixed and variable rate debt.

Our derivative instruments for 2015 included seven forward-starting interest rate swaps designated as cash flow hedges to change the floating rate interest payments for $350,000 and $100,000 in borrowings associated with the Term A Loans and Term B Loans, respectively, under the Company’s prior credit agreement, to fixed rate interest payments beginning June 30, 2015 and maturing on December 31, 2017. In May 2015, the Company terminated these interest rate swaps and paid $7,275, which was recorded against the derivative liability. In addition, the Company incurred $62 in fees to terminate the interest rate swaps which was included in “Loss on early extinguishment of debt.” See Note 11 for further information. The unrealized loss on the cash flow hedges at termination of $7,275 was reclassified on a straight-line basis from “Accumulated other comprehensive loss” to “Interest expense, net” beginning June 30, 2015 (the original effective date of the interest rate swaps) through December 31, 2017 (the original maturity date of the interest rate swaps). As a result, 2017, 2016 and 2015 include the reclassification of unrealized losses on the cash flow hedges of $2,894, $2,894 and $1,487, respectively, from “Accumulated other comprehensive loss” to “Interest expense.”

There was no hedge ineffectiveness from these cash flows hedges through their termination in May 2015.

Non-Recurring Fair Value Measurements

Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our consolidated statements of operations.

Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements and favorable lease assets) to fair value as a result of (1) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants and (2) declines in operating performance at Company-operated restaurants. The fair value of long-lived assets held and used presented in the tables below represents the remaining carrying value and was estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future Company-operated restaurant performance.

Total impairment losses may also include the impact of remeasuring long-lived assets held for sale, which primarily include surplus properties. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 16 for more information on impairment of our long-lived assets.



			Fair Value Measurements						2017 Total Losses
	December 31, 2017		Level 1		Level 2		Level 3		2017 Total Losses
Held and used	$	757	$	—	$	—	$	757	$	3,413
Held for sale	1,560		—		—		1,560		684
Total	$	2,317	$	—	$	—	$	2,317	$	4,097



			Fair Value Measurements						2016 Total Losses
	January 1, 2017		Level 1		Level 2		Level 3		2016 Total Losses
Held and used	$	5,462	$	—	$	—	$	5,462	$	15,928
Held for sale	1,552		—		—		1,552		313
Total	$	7,014	$	—	$	—	$	7,014	$	16,241

In addition, the Company measured assets acquired and liabilities assumed at fair value as part of the DavCo and NPC Transactions during 2017. See Note 2 for further information.