Pizza Hut 2001 Annual Report Download - page 54

52 TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
match those of the underlying receivables or payables. We also
enter into foreign currency forward contracts to reduce our cash
flow volatility associated with certain forecasted foreign currency
denominated royalties. These forward contracts have historically
been short-term in nature, with termination dates matching
forecasted settlement dates of the receivables or payables or
cash receipts from royalties within the next twelve months. For
those foreign currency exchange forward contracts that we have
designated as cash flow hedges, we measure ineffectiveness by
comparing the cumulative change in the forward contract with
the cumulative change in the hedged item, both of which are
based on forward rates. No ineffectiveness was recognized in
2001 for those foreign currency forward contracts designated
as cash flow hedges.
Commodities
We also utilize on a limited basis commodity futures and options
contracts to mitigate our exposure to commodity price fluctua-
tions over the next twelve months. Those contracts have not
been designated as hedges under SFAS 133. There were no
open commodity future and options contracts outstanding at
December 29, 2001 and those outstanding as of the adoption
of SFAS 133 on December 31, 2000 were not significant.
Deferred Amounts in Accumulated Other
Comprehensive Income (Loss)
As of December 29, 2001, we had a net deferred loss associ-
ated with cash flow hedges of approximately $1 million, net of
tax. Of this amount, we estimate that a net after-tax gain of less
than $1 million will be reclassified into earnings through
December 28, 2002. The remaining net after-tax loss of approx-
imately $1 million, which arose from the settlement of treasury
locks entered into prior to the issuance of certain amounts of
our fixed-rate debt, will be reclassified into earnings from
December 29, 2002 through 2011 as an increase to interest
expense on this debt.
Credit Risks
Our credit risk from the interest rate swap, collar and forward
rate agreements and foreign exchange contracts is dependent
both on the movement in interest and currency rates and pos-
sibility of non-payment by counterparties. We mitigate credit
risk by entering into these agreements with high-quality coun-
terparties, netting swap and forward rate payments within
contracts and limiting payments associated with the collars to
differences outside the collared range.
Accounts receivable consists primarily of amounts due from
franchisees and licensees for initial and continuing fees. In addi-
tion, we have notes and lease receivables from certain of our
franchisees. The financial condition of these franchisees and
licensees is largely dependent upon the underlying business
trends of our Concepts. This concentration of credit risk is mit-
igated, in part, by the large number of franchisees and licensees
of each Concept and the short-term nature of the franchise and
license fee receivables.
Fair Value
At December 29, 2001 and December 30, 2000, the fair values
of cash and cash equivalents, short-term investments, accounts
receivable, and accounts payable approximated carrying value
because of the short-term nature of these instruments. The fair
value of notes receivable approximate carrying value after con-
sideration of recorded allowances.
The carrying amounts and fair values of our other financial
instruments subject to fair value disclosures are as follows:
2001 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
Debt:
Short-term borrowings and long-term debt, excluding capital leases
and the derivative instrument adjustments $ 2,135 $ 2,215 $ 2,413 $ 2,393
Debt-related derivative instruments:
Open contracts in a net asset position 37 37 —24
Foreign currency-related derivative instruments:
Open contracts in a net asset position 55——
Guarantees and letters of credit —38—51
We estimated the fair value of debt, debt-related derivative instruments, foreign currency-related derivative instruments, guaran-
tees and letters of credit using market quotes and calculations based on market rates.