Pizza Hut 2004 Annual Report Download - page 54

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U.S.฀Our฀equity฀ownership฀in฀each฀cooperative฀is฀generally฀
proportional฀to฀our฀percentage฀ownership฀of฀the฀U.S.฀sys-
tem฀units฀for฀the฀Concept.฀We฀account฀for฀our฀investments฀
in฀ these฀purchasing฀cooperatives฀ using฀ the฀ cost฀ method,฀
under฀which฀our฀recorded฀balances฀were฀not฀significant฀at฀
December฀25,฀2004฀or฀December฀27,฀2003.
As฀ a฀ result฀ of฀ the฀ adoption฀ of฀ FIN฀46R,฀ we฀ have฀ not฀
consolidated฀any฀franchise฀entities,฀purchasing฀cooperatives฀
or฀other฀entities.
Fiscal฀ Year฀ Our฀fiscal฀ year฀ ends฀on฀ the฀ last฀ Saturday฀in฀
December฀and,฀as฀a฀result,฀a฀fifty-third฀week฀is฀added฀every฀
five฀or฀six฀years.฀Fiscal฀year฀2000฀included฀53฀weeks.฀The฀
Company’s฀ next฀ fiscal฀ year฀ with฀ 53฀ weeks฀ will฀ be฀ 2005.฀
The฀ first฀ three฀ quarters฀ of฀ each฀ fiscal฀ year฀ consist฀ of฀ 12฀
weeks฀and฀the฀fourth฀quarter฀consists฀of฀16฀weeks฀in฀fiscal฀
years฀with฀52฀weeks฀and฀17฀weeks฀in฀fiscal฀years฀with฀53฀
weeks.฀Our฀subsidiaries฀operate฀on฀similar฀fiscal฀calendars฀
with฀period฀or฀month฀end฀dates฀suited฀to฀their฀businesses.฀
The฀subsidiaries’฀period฀end฀dates฀are฀within฀one฀week฀of฀
YUM’s฀period฀end฀date฀with฀the฀exception฀of฀our฀international฀
businesses,฀which฀close฀one฀period฀or฀one฀month฀earlier฀to฀
facilitate฀consolidated฀reporting.
Reclassifications฀ We฀have฀reclassified฀certain฀items฀in฀the฀
accompanying฀Consolidated฀Financial฀Statements฀and฀Notes฀
thereto฀for฀prior฀periods฀to฀be฀comparable฀with฀the฀classifi-
cation฀for฀the฀fiscal฀year฀ended฀December฀25,฀2004.฀These฀
reclassifications฀ had฀no฀effect฀on฀previously฀reported฀ net฀
income.
Franchise฀and฀License฀Operations฀ We฀execute฀franchise฀or฀
license฀agreements฀for฀each฀unit฀which฀set฀out฀the฀terms฀
of฀ our฀ arrangement฀ with฀ the฀ franchisee฀ or฀ licensee.฀ Our฀
franchise฀and฀license฀agreements฀typically฀require฀the฀fran-
chisee฀or฀licensee฀to฀pay฀an฀initial,฀non-refundable฀fee฀and฀
continuing฀fees฀based฀upon฀a฀percentage฀of฀sales.฀Subject฀
to฀our฀approval฀and฀their฀payment฀of฀a฀renewal฀fee,฀a฀fran-
chisee฀may฀generally฀renew฀the฀franchise฀agreement฀upon฀
its฀expiration.
We฀incur฀expenses฀that฀benefit฀both฀our฀franchise฀and฀
license฀communities฀and฀their฀representative฀organizations฀
and฀ our฀Company฀ operated฀ restaurants.฀ These฀ expenses,฀
along฀with฀other฀costs฀of฀servicing฀of฀franchise฀and฀license฀
agreements฀are฀charged฀to฀general฀and฀administrative฀(“G&A”)฀
expenses฀as฀incurred.฀Certain฀direct฀costs฀of฀our฀franchise฀
and฀license฀operations฀are฀charged฀to฀franchise฀and฀license฀
expenses.฀ These฀ costs฀ include฀ provisions฀ for฀ estimated฀
uncollectible฀fees,฀franchise฀and฀license฀marketing฀funding,฀
amortization฀expense฀for฀franchise฀related฀intangible฀assets฀
and฀certain฀other฀direct฀incremental฀franchise฀and฀license฀
support฀costs.฀Franchise฀and฀license฀expenses฀also฀include฀
occupancy฀costs฀associated฀with฀restaurants฀we฀sublease฀to฀
franchisees,฀net฀of฀any฀rental฀income฀we฀receive.
We฀monitor฀the฀financial฀condition฀of฀our฀franchisees฀
and฀licensees฀and฀ record฀provisions฀for฀estimated฀losses฀
on฀ receivables฀ when฀ we฀ believe฀ that฀ our฀ franchisees฀ or฀
licensees฀are฀unable฀to฀make฀their฀required฀payments.฀While฀
we฀use฀the฀best฀information฀available฀in฀making฀our฀determi-
nation,฀the฀ultimate฀recovery฀of฀recorded฀receivables฀is฀also฀
dependent฀upon฀future฀economic฀events฀and฀other฀conditions฀
that฀ may฀be฀beyond฀ our฀ control.฀ Net฀ provisions฀for฀uncol-
lectible฀franchise฀and฀license฀receivables฀of฀$1฀million฀and฀
$15฀million฀were฀included฀in฀franchise฀and฀license฀expense฀
in฀2004฀and฀2002,฀respectively.฀Included฀in฀franchise฀and฀
license฀expense฀in฀2003฀was฀a฀net฀benefit฀for฀uncollectible฀
franchise฀and฀license฀receivables฀of฀$3฀million,฀as฀we฀were฀
able฀to฀recover฀previously฀reserved฀receivables฀in฀excess฀of฀
current฀provisions.
Revenue฀Recognition฀ The฀Company’s฀revenues฀consist฀of฀
sales฀by฀Company฀operated฀restaurants฀and฀fees฀from฀our฀
franchisees฀and฀licensees.฀Revenues฀from฀Company฀operated฀
restaurants฀ are฀ recognized฀ when฀ payment฀ is฀ tendered฀ at฀
the฀time฀of฀sale.฀We฀recognize฀initial฀fees฀received฀from฀a฀
franchisee฀or฀licensee฀as฀revenue฀when฀we฀have฀performed฀
substantially฀all฀initial฀services฀required฀by฀the฀franchise฀or฀
license฀agreement,฀which฀is฀generally฀upon฀the฀opening฀of฀a฀
store.฀We฀recognize฀continuing฀fees฀based฀upon฀a฀percentage฀
of฀franchisee฀and฀licensee฀sales฀as฀earned.฀We฀recognize฀
renewal฀fees฀when฀a฀renewal฀agreement฀with฀a฀franchisee฀or฀
licensee฀becomes฀effective.฀We฀include฀initial฀fees฀collected฀
upon฀the฀sale฀of฀a฀restaurant฀to฀a฀franchisee฀in฀refranchising฀
gains฀(losses).
Direct฀Marketing฀Costs฀ We฀report฀substantially฀all฀of฀our฀
direct฀ marketing฀ costs฀ in฀ occupancy฀ and฀ other฀ operating฀
expenses.฀ We฀ charge฀ direct฀ marketing฀ costs฀ to฀ expense฀
ratably฀in฀relation฀to฀revenues฀over฀the฀year฀in฀which฀incurred฀
and,฀in฀the฀case฀of฀advertising฀production฀costs,฀in฀the฀year฀
the฀advertisement฀is฀first฀shown.฀Deferred฀direct฀marketing฀
costs,฀which฀are฀classified฀as฀prepaid฀expenses,฀consist฀of฀
media฀and฀related฀advertising฀production฀costs฀which฀will฀
generally฀ be฀used฀for฀ the฀first฀time฀in฀the฀next฀fiscal฀year฀
and฀have฀historically฀not฀been฀significant.฀To฀the฀extent฀we฀
participate฀ in฀ advertising฀ cooperatives,฀ we฀ expense฀ our฀
contributions฀as฀incurred.฀Our฀advertising฀ expenses฀ were฀
$458฀million,฀$419฀million฀and฀$384฀million฀in฀2004,฀2003฀
and฀2002,฀respectively.
Research฀and฀Development฀Expenses฀ Research฀and฀devel-
opment฀expenses,฀which฀we฀expense฀as฀incurred,฀are฀reported฀
in฀G&A฀expenses.฀Research฀and฀development฀expenses฀were฀
$26฀million฀in฀both฀2004฀and฀2003฀and฀$23฀million฀in฀2002.
Impairment฀ or฀ Disposal฀ of฀ Long-Lived฀ Assets฀ In฀ accor-
dance฀ with฀ SFAS฀No.฀144,฀ “Accounting฀ for฀ the฀ Impairment฀
or฀Disposal฀of฀Long-Lived฀Assets”฀(“SFAS฀144”),฀we฀review฀
our฀long-lived฀assets฀related฀to฀each฀restaurant฀to฀be฀held฀
and฀used฀in฀the฀business,฀including฀any฀allocated฀intangible฀
assets฀subject฀to฀amortization,฀semi-annually฀for฀impairment,฀
or฀whenever฀events฀ or฀ changes฀ in฀ circumstances฀indicate฀
that฀the฀carrying฀amount฀of฀a฀restaurant฀may฀not฀be฀recover-
able.฀We฀evaluate฀restaurants฀using฀a฀“two-year฀history฀of฀
operating฀losses”฀as฀our฀primary฀indicator฀of฀potential฀impair-
ment.฀Based฀on฀the฀best฀information฀available,฀we฀write฀down฀
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