Pizza Hut 2004 Annual Report Download - page 45

CRITICAL฀ACCOUNTING฀POLICIES฀AND฀ESTIMATES
Our฀ reported฀ results฀ are฀ impacted฀ by฀ the฀ application฀ of฀
certain฀accounting฀policies฀that฀require฀us฀to฀make฀subjective฀
or฀complex฀judgments.฀These฀judgments฀involve฀estimations฀
of฀the฀effect฀of฀matters฀that฀are฀inherently฀uncertain฀and฀may฀
significantly฀impact฀our฀quarterly฀or฀annual฀results฀of฀opera-
tions฀or฀financial฀condition.฀Changes฀in฀the฀estimates฀and฀
judgments฀could฀significantly฀affect฀our฀results฀of฀operations,฀
financial฀condition฀and฀cash฀flows฀in฀future฀years.฀A฀descrip-
tion฀of฀what฀we฀consider฀to฀be฀our฀most฀significant฀critical฀
accounting฀policies฀follows.
Impairment฀or฀Disposal฀of฀Long-Lived฀Assets฀ We฀evaluate฀
our฀long-lived฀assets฀for฀impairment฀at฀the฀individual฀restau-
rant฀level฀except฀when฀there฀is฀an฀expectation฀that฀we฀will฀
refranchise฀ restaurants฀as฀a฀group.฀Restaurants฀held฀and฀
used฀are฀evaluated฀for฀impairment฀on฀a฀semi-annual฀basis฀or฀
whenever฀events฀or฀circumstances฀indicate฀that฀the฀carrying฀
amount฀of฀a฀restaurant฀may฀not฀be฀recoverable฀(including฀a฀
decision฀to฀close฀a฀restaurant฀or฀an฀offer฀to฀refranchise฀a฀
restaurant฀or฀group฀of฀restaurants฀for฀less฀than฀the฀carrying฀
value).฀Our฀semi-annual฀test฀includes฀those฀restaurants฀that฀
have฀experienced฀two฀consecutive฀years฀of฀operating฀losses.฀
These฀impairment฀evaluations฀require฀an฀estimation฀of฀cash฀
flows฀over฀the฀remaining฀useful฀life฀of฀the฀primary฀asset฀of฀
the฀restaurant,฀which฀can฀be฀for฀a฀period฀of฀over฀20฀years,฀
and฀any฀terminal฀value.฀We฀limit฀assumptions฀about฀impor-
tant฀factors฀such฀as฀sales฀growth฀and฀margin฀improvement฀to฀
those฀that฀are฀supportable฀based฀upon฀our฀plans฀for฀the฀unit฀
and฀actual฀results฀at฀comparable฀restaurants.
If฀the฀long-lived฀assets฀of฀a฀restaurant฀on฀a฀held฀and฀
used฀ basis฀ are฀ not฀ recoverable฀ based฀ upon฀ forecasted,฀
undiscounted฀ cash฀ flows,฀ we฀ write฀ the฀ assets฀ down฀ to฀
their฀fair฀value.฀This฀fair฀value฀is฀determined฀by฀discounting฀
the฀forecasted฀cash฀flows,฀including฀terminal฀value,฀of฀the฀
restaurant฀at฀an฀appropriate฀rate.฀The฀discount฀rate฀used฀
is฀our฀cost฀of฀capital,฀adjusted฀upward฀when฀a฀higher฀risk฀is฀
believed฀to฀exist.
When฀it฀is฀probable฀that฀we฀will฀sell฀a฀restaurant฀within฀
one฀ year,฀ we฀ write฀ down฀ the฀ restaurant฀ to฀ its฀ fair฀ value.฀
We฀often฀refranchise฀restaurants฀in฀groups฀and,฀therefore,฀
perform฀such฀impairment฀evaluations฀at฀the฀group฀level.฀Fair฀
value฀is฀based฀on฀the฀expected฀sales฀proceeds฀less฀appli-
cable฀transaction฀costs.฀Estimated฀sales฀proceeds฀are฀based฀
on฀the฀most฀relevant฀of฀historical฀sales฀multiples฀or฀bids฀from฀
buyers,฀and฀have฀historically฀been฀reasonably฀accurate฀esti-
mations฀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฀investment฀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฀values฀of฀our฀investments฀in฀unconsolidated฀affiliates฀
are฀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฀unit฀over฀twenty฀years฀plus฀an฀expected฀
terminal฀value.฀We฀limit฀assumptions฀about฀important฀factors฀
such฀as฀sales฀growth฀and฀margin฀improvement฀to฀those฀that฀
are฀supportable฀based฀upon฀our฀plans฀for฀the฀reporting฀unit.฀
For฀ 2004,฀ there฀ was฀ no฀ impairment฀ of฀ goodwill฀ identified฀
during฀our฀annual฀impairment฀testing.
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฀certain฀trademarks/brands฀of฀
which฀we฀have฀acquired฀ownership.฀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฀fran-
chise฀stores,฀due฀to฀our฀ownership฀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฀indefinite-lived฀trademark/brand฀
asset฀we฀have฀recorded฀is฀the฀LJS฀trademark/brand฀in฀the฀
amount฀of฀ $140฀million.฀The฀fair฀value฀of฀this฀ trademark/
brand฀is฀currently฀in฀excess฀of฀its฀carrying฀value฀as฀are฀the฀
fair฀values฀of฀all฀other฀recorded฀trademarks/brands฀with฀an฀
indefinite฀life.฀While฀we฀believe฀the฀sales฀assumptions฀used฀
in฀our฀determinations฀of฀fair฀value฀for฀our฀trademarks/brands฀
are฀consistent฀with฀our฀operating฀plans฀and฀forecasts,฀fluctua-
tions฀in฀the฀assumptions฀would฀have฀impacted฀our฀impairment฀
calculation.฀If฀the฀long-term฀rate฀of฀sales฀growth฀used฀in฀each฀
of฀our฀fair฀value฀determinations฀for฀our฀trademarks/brands฀
had฀been฀one฀percentage฀point฀lower,฀such฀fair฀values฀would฀
have฀continued฀to฀exceed฀carrying฀value฀in฀all฀instances.
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Yum!฀Brands,฀Inc.