Pizza Hut 2003 Annual Report Download - page 66

64.
comparing the cumulative change in the forward contract
with the cumulative change in the hedged item. No signifi-
cant ineffectiveness was recognized in 2003 or 2002 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 fluctuations over the next twelve months. Those
contracts have not been designated as hedges under
SFAS 133. Commodity future and options contracts
entered into for the fiscal years ended December 27, 2003
and December 28, 2002 did not significantly impact the
Consolidated Financial Statements.
Deferred Amounts in Accumulated Other
Comprehensive Income (Loss)
As of December 27, 2003, we had a net deferred loss asso-
ciated with cash flow hedges of approximately $2 million,
net of tax. Of this amount, we estimate that a net after-
tax loss of less than $1 million will be reclassified into
earnings through December 25, 2004. The remaining net
after-tax loss of approximately $2 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 26, 2004 through
2012 as an increase to interest expense on this debt.
Credit Risks
Credit risk from interest rate swap, treasury lock and
forward rate agreements and foreign exchange contracts is
dependent both on movement in interest and currency rates
and the possibility of non-payment by counterparties. We
mitigate credit risk by entering into these agreements with
high-quality counterparties, and netting swap and forward
rate payments within contracts.
Accounts receivable consists primarily of amounts due
from franchisees and licensees for initial and continuing
fees. In addition, 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 mitigated, 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 27, 2003 and December 28, 2002, 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 approximates carrying value after consideration
of recorded allowances.
The carrying amounts and fair values of our other
financial instruments subject to fair value disclosures are
as follows:
2003 2002
Carrying Fair Carrying Fair
Amount Value Amount Value
Debt
Short-term borrowings
and long-term debt,
excluding capital leases
and the derivative
instrument adjustments $ 1,925 $ 2,181 $ 2,302 $ 2,470
Debt-related derivative
instruments:
Open contracts in a net
asset position 31 31 48 48
Foreign currency-related
derivative instruments:
Open contracts in a net
asset (liability) position — — (1) (1)
Lease guarantees 8 37 4 42
Guarantees supporting
financial arrangements of
certain franchisees,
unconsolidated affiliates
and other third parties 8 10 16 17
Letters of credit — 3 — 3
We estimated the fair value of debt, debt-related derivative
instruments, foreign currency-related derivative instruments,
guarantees and letters of credit using market quotes and
calculations based on market rates.
PENSION AND POSTRETIREMENT MEDICAL BENEFITS
note
17
Pension Benefits
We sponsor noncontributory defined benefit pension
plans covering substantially all full-time U.S. salaried
employees, certain hourly employees and certain interna-
tional employees. The most significant of these plans, the
YUM Retirement Plan (the “Plan”), is funded while benefits
from the other plan are paid by the Company as incurred.
During 2001, the Plan was amended such that any sala-
ried employee hired or rehired by YUM after September 30,
2001 is not eligible to participate in the Plan. Benefits are
based on years of service and earnings or stated amounts
for each year of service.
Postretirement Medical Benefits
Our postretirement plan provides health care benefits,
principally to U.S. salaried retirees and their dependents.
This plan includes retiree cost sharing provisions. During
2001, the plan was amended such that any salaried
employee hired or rehired by YUM after September 30,
2001 is not eligible to participate in this plan. Employees
hired prior to September 30, 2001 are eligible for benefits