Kentucky Fried Chicken 2004 Annual Report Download - page 47
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Please find page 47 of the 2004 Kentucky Fried Chicken annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Income Tax Valuation Allowances and Tax Reserves At
December25, 2004, we have a valuation allowance of
$351million primarily to reduce our net operating loss
andtaxcreditcarryforwardsof$231millionandourother
deferred tax assetsto amountsthat willmore likelythan
notberealized.Thenetoperatinglossandtaxcreditcarry-
forwardsexistinmanystateandforeignjurisdictionsand
havevaryingcarryforwardperiodsandrestrictionsonusage.
Theestimationoffuturetaxableincomeinthesestateand
foreignjurisdictionsandourresultingability to utilizenet
operatinglossandtaxcreditcarryforwardscansignificantly
changebasedonfutureevents,includingourdeterminations
astothefeasibilityofcertaintaxplanningstrategies.Thus,
recordedvaluationallowancesmaybesubjecttomaterial
futurechanges.
As a matter of course, we are regularly audited by
federal,stateandforeigntaxauthorities.Weprovidereserves
forpotentialexposureswhenweconsideritprobablethat
a taxing authority may take a sustainable position on a
mattercontrarytoourposition.Weevaluatethesereserves,
includinginterestthereon,onaquarterlybasistoinsurethat
theyhavebeenappropriatelyadjustedforevents,including
auditsettlements,thatmayimpactourultimatepaymentfor
suchexposures.
SeeNote22forafurtherdiscussionofourincometaxes.
QUANTITATIVEANDQUALITATIVE
DISCLOSURESABOUTMARKETRISK
TheCompanyisexposed tofinancialmarketrisksassoci-
atedwithinterestrates,foreigncurrencyexchangeratesand
commodityprices.Inthenormalcourseofbusinessandin
accordancewithourpolicies,wemanagetheserisksthrough
avarietyofstrategies,whichmayincludetheuseofderivative
financialandcommodityinstrumentstohedgeourunderlying
exposures.Ourpoliciesprohibittheuseofderivativeinstru-
mentsfortradingpurposes,andwehaveproceduresinplace
tomonitorandcontroltheiruse.
Interest Rate Risk We have a market risk exposure to
changesininterestrates,principallyintheUnitedStates.
We attempt to minimize this risk and lower our overall
borrowingcoststhroughtheutilizationofderivativefinancial
instruments,primarilyinterestrateswaps.Theseswapsare
enteredintowithfinancialinstitutionsandhaveresetdates
andcriticaltermsthatmatchthoseoftheunderlyingdebt.
Accordingly, any change in market value associated with
interestrateswapsisoffsetbytheoppositemarketimpact
ontherelateddebt.
At December25, 2004 and December27, 2003, a
hypothetical100basispointincreaseinshort-terminterest
rateswouldresult,overthefollowingtwelve-monthperiod,
ina reductionofapproximately$6millionand $3million,
respectively,inincomebeforeincometaxes.Theestimated
reductionsarebaseduponthelevel of variable ratedebt
andassume no changesinthevolume or compositionof
debt.Inaddition,thefairvalueofourderivativefinancial
instrumentsatDecember25,2004andDecember27,2003
woulddecreaseapproximately$51millionand$5million,
respectively.ThefairvalueofourSeniorUnsecuredNotes
at December25, 2004 and December27, 2003 would
decreaseapproximately$76millionand$87million,respec-
tively.Fairvaluewasdeterminedbydiscountingtheprojected
cashflows.
ForeignCurrencyExchangeRateRisk Internationaloper-
atingprofitconstitutesapproximately41%ofouroperating
profitin2004,excludingunallocatedincome(expenses).
In addition, the Company’s net asset exposure (defined
asforeigncurrencyassetslessforeigncurrencyliabilities)
totaledapproximately$1.5billionasofDecember25,2004.
Operatingininternational marketsexposestheCompany
to movements in foreign currency exchange rates. The
Company’sprimaryexposuresresultfromouroperationsin
Asia-Pacific,theAmericas andEurope.Changesinforeign
currencyexchangerateswouldimpactthetranslationofour
investmentsinforeignoperations,thefairvalueofourforeign
currencydenominatedfinancialinstrumentsandourreported
foreigncurrencydenominatedearningsandcashflows.For
thefiscalyearendedDecember25,2004,operatingprofit
wouldhavedecreased$59millionifallforeigncurrencieshad
uniformlyweakened10%relativetotheU.S.dollar.Theesti-
matedreductionassumesnochangesinsalesvolumesor
localcurrencysalesorinputprices.
Weattempttominimizetheexposurerelatedtoour
investmentsinforeignoperationsbyfinancingthoseinvest-
mentswithlocalcurrencydebtwhenpracticalandholding
cash in local currencies when possible. In addition, we
attempttominimizetheexposurerelatedtoforeigncurrency
denominatedfinancialinstrumentsbypurchasinggoodsand
services fromthirdpartiesinlocal currencieswhen prac-
tical.Consequently,foreigncurrencydenominatedfinancial
instruments consist primarily of intercompany short-term
receivables and payables. At times, we utilize forward
contracts to reduce our exposure related to these inter-
companyshort-termreceivablesandpayables.Thenotional
amountandmaturitydatesofthesecontractsmatchthose
of the underlying receivables or payables such that our
foreigncurrencyexchangeriskrelatedtotheseinstruments
iseliminated.
CommodityPriceRisk Wearesubjecttovolatilityinfood
costsasaresultofmarketriskassociatedwithcommodity
prices.Ourabilitytorecoverincreasedcoststhroughhigher
pricingis,attimes,limitedbythecompetitiveenvironment
inwhichweoperate.Wemanageourexposuretothisrisk
primarilythroughpricingagreementsaswellas,onalimited
basis,commodityfutureand option contracts. Commodity
futureandoptioncontractsenteredintoforthefiscalyears
endedDecember25,2004,andDecember27,2003,didnot
significantlyimpactourfinancialposition,resultsofopera-
tionsorcashflows.
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Yum!Brands,Inc.