Pizza Hut 2003 Annual Report Download - page 47

Yum! Brands Inc. 45.
from buyers, and have historically been reasonably accurate
estimations of the proceeds ultimately received.
See Note 2 for a further discussion of our policy
regarding the impairment or disposal of long-lived assets.
Impairment of Investments in Unconsolidated Affiliates
We record impairment charges related to an invest-
ment in an unconsolidated affiliate whenever events or
circumstances indicate that a decrease in the value of an
investment has occurred which is other than temporary. In
addition, we evaluate our investments in unconsolidated
affiliates for impairment when they have experienced two
consecutive years of operating losses. Our impairment
measurement test for an investment in an unconsolidated
affiliate is similar to that for our restaurants except that we
use discounted cash flows after interest and taxes instead
of discounted cash flows before interest and taxes as used
for our restaurants. The fair value of our investments in
unconsolidated affiliates is generally significantly in excess
of their carrying value.
See Note 2 for a further discussion of our policy
regarding the impairment of investments in unconsolidated
affiliates.
Impairment of Goodwill and Indefinite-Lived
Intangible Assets
We evaluate goodwill and indefinite-lived intangible assets
for impairment on an annual basis or more often if an event
occurs or circumstances change that indicates impairment
might exist. Goodwill is evaluated for impairment through
the comparison of fair value of our reporting units to their
carrying values. Our reporting units are our operating
segments in the U.S. and our business management units
internationally (typically individual countries). Fair value is
the price a willing buyer would pay for the reporting unit,
and is generally estimated by discounting expected future
cash flows from the reporting units over twenty years plus
an expected terminal value. We limit assumptions about
important factors such as sales growth and margin improve-
ment to those that are supportable based upon our plans
for the reporting unit.
For 2003, there was no impairment of goodwill identi-
fied during our annual impairment testing. For our reporting
units with goodwill, the fair value is generally significantly
in excess of the recorded carrying value. Thus, we do not
believe that we have material goodwill that is at risk to be
impaired given current business performance. For 2002,
we impaired $5 million of goodwill related to the Pizza Hut
France reporting unit.
Our impairment test for indefinite-lived intangible
assets consists of a comparison of the fair value of the
asset with its carrying amount. Our indefinite-lived intangible
assets consist of values assigned to trademarks/brands
of which we have acquired ownership (or the right to a
perpetual royalty-free license in the case of A&W). We
believe the value of these trademarks/brands is derived
from the royalty we avoid, in the case of Company stores, or
receive, in the case of franchise stores, due to our owner-
ship of or royalty-free license of the trademarks/brands.
Thus, anticipated sales are the most important assumption
in valuing trademarks/brands. We limit assumptions about
sales growth, as well as other factors impacting the fair
value calculation, to those that are supportable based on
our plans for the applicable Concept.
The most significant recorded trademark/brand assets
resulted when we acquired YGR in 2002. Upon this acqui-
sition, $140 million and $72 million were allocated to the
LJS and A&W trademarks/brands, respectively. The results
generated to date from the YGR acquisition on an overall
basis have met our expectations. We also now believe
opportunities exist beyond those assumed in justification
of our acquisition price with regard to increased penetra-
tion of LJS, for both stand-alone units and as a multibrand
partner. Accordingly, we now believe our system’s devel-
opment capital, at least through the term of our current
projections, will be primarily directed towards LJS.
The decision to focus short-term development on
increased penetration of LJS and discretionary capital
spending limits have resulted in less than originally planned
development of A&W in the near term. Additionally, while we
continue to view A&W as a viable multibrand partner, subse-
quent to acquisition we decided to close or refranchise all
Company-owned A&W restaurants that we had acquired.
These restaurants were low-volume, mall-based units, that
were inconsistent with the remainder of our Company-
owned portfolio. We incorporated these plans into our fair
value estimates of the LJS and A&W trademarks/brands in
2003. As sales projections for LJS were in excess of those
originally assumed when valuing the LJS trademark/brand,
the trademark/brand’s current fair value is in excess of its
carrying value. Both the decision to close the Company-
owned A&W units and the decision to focus on short-term
development opportunities at LJS negatively impacted the
fair value of the A&W trademark/brand. Accordingly, we
recorded a charge of $5 million in 2003 to write the value
of A&W trademark/brand down to its fair value.
While we believe the sales assumptions used in our
determination of the fair value of the A&W trademark/brand
are reasonable and consistent with our operating plans
and forecasts, fluctuations in the assumptions would
have impacted our impairment calculation. If the long-term
rate of sales growth used in our determination of the fair
value of the A&W trademark/brand would have been one
percentage point higher, the trademark/brand would not
have been impaired. Alternatively, if the long-term rate of
sales growth would have been one percentage point lower,
additional impairment of approximately $4 million would
have been recognized.
See Note 2 for a further discussion of our policies
regarding goodwill and indefinite-lived intangible assets.