Pizza Hut 2004 Annual Report Download - page 55

an฀impaired฀ restaurant฀to฀its฀estimated฀fair฀market฀value,฀
which฀becomes฀its฀new฀cost฀basis.฀We฀generally฀measure฀
estimated฀fair฀market฀value฀by฀discounting฀estimated฀future฀
cash฀flows.฀In฀addition,฀when฀we฀decide฀to฀close฀a฀restau-
rant฀it฀is฀reviewed฀for฀impairment฀and฀depreciable฀lives฀are฀
adjusted฀based฀on฀the฀expected฀disposal฀date.฀The฀impair-
ment฀evaluation฀is฀based฀on฀the฀estimated฀cash฀flows฀from฀
continuing฀use฀through฀the฀expected฀disposal฀date฀plus฀the฀
expected฀terminal฀value.
The฀Company฀has฀adopted฀SFAS฀No.฀146,฀“Accounting฀for฀
Costs฀Associated฀with฀Exit฀or฀Disposal฀Activities”฀(“SFAS฀146”),฀
effective฀for฀exit฀or฀disposal฀activities฀that฀were฀initiated฀after฀
December฀31,฀2002.฀Costs฀addressed฀by฀SFAS฀146฀include฀
costs฀to฀terminate฀a฀contract฀that฀is฀not฀a฀capital฀lease,฀costs฀
of฀involuntary฀employee฀termination฀benefits฀pursuant฀to฀a฀
one-time฀ benefit฀ arrangement,฀ costs฀ to฀ consolidate฀ facili-
ties฀and฀costs฀to฀relocate฀ employees.฀SFAS฀146฀changes฀
the฀timing฀of฀expense฀recognition฀for฀certain฀costs฀we฀incur฀
while฀closing฀restaurants฀or฀undertaking฀other฀exit฀or฀disposal฀
activities;฀however,฀the฀timing฀difference฀is฀not฀typically฀signifi-
cant฀in฀length.฀Adoption฀of฀SFAS฀146฀did฀not฀have฀a฀material฀
impact฀ on฀ our฀ Consolidated฀ Financial฀ Statements฀ for฀ the฀
years฀ended฀December฀25,฀2004฀or฀December฀27,฀2003.
Store฀ closure฀ costs฀ include฀costs฀ of฀disposing฀ of฀ the฀
assets฀as฀well฀as฀other฀facility-related฀expenses฀from฀previ-
ously฀closed฀stores.฀These฀store฀closure฀costs฀are฀generally฀
expensed฀as฀incurred.฀Additionally,฀at฀the฀date฀we฀cease฀using฀
a฀property฀under฀an฀operating฀lease,฀we฀record฀a฀liability฀for฀
the฀net฀present฀value฀of฀any฀remaining฀lease฀obligations,฀net฀
of฀estimated฀sublease฀income,฀if฀any.฀To฀the฀extent฀we฀sell฀
assets,฀primarily฀land,฀associated฀with฀a฀closed฀store,฀any฀gain฀
or฀loss฀upon฀that฀sale฀is฀recorded฀in฀store฀closure฀costs.
Refranchising฀gains฀(losses)฀includes฀the฀gains฀or฀losses฀
from฀the฀sales฀of฀our฀restaurants฀to฀new฀and฀existing฀fran-
chisees฀and฀the฀related฀ initial฀ franchise฀ fees,฀reduced฀by฀
transaction฀costs.฀In฀executing฀our฀refranchising฀initiatives,฀we฀
most฀often฀offer฀groups฀of฀restaurants.฀We฀classify฀restaurants฀
as฀held฀for฀sale฀and฀suspend฀depreciation฀and฀amortization฀
when฀(a)฀we฀make฀a฀decision฀to฀refranchise;฀(b)฀the฀stores฀
can฀be฀immediately฀removed฀from฀operations;฀(c)฀we฀have฀
begun฀ an฀active฀program฀to฀locate฀ a฀buyer;฀(d)฀significant฀
changes฀to฀the฀plan฀of฀sale฀are฀not฀likely;฀and฀(e)฀the฀sale฀is฀
probable฀within฀one฀year.฀We฀recognize฀estimated฀losses฀on฀
refranchisings฀when฀the฀restaurants฀are฀classified฀as฀held฀for฀
sale.฀We฀also฀recognize฀as฀refranchising฀losses฀impairment฀
associated฀with฀stores฀we฀have฀offered฀to฀refranchise฀for฀a฀
price฀less฀than฀their฀carrying฀value,฀but฀do฀not฀believe฀have฀
met฀the฀criteria฀to฀be฀classified฀as฀held฀for฀sale.฀We฀recognize฀
gains฀on฀restaurant฀refranchisings฀when฀ the฀sale฀ transac-
tion฀closes,฀the฀franchisee฀has฀a฀ minimum฀amount฀of฀the฀
purchase฀price฀in฀at-risk฀equity,฀and฀we฀are฀satisfied฀that฀the฀
franchisee฀can฀meet฀its฀financial฀obligations.฀If฀the฀criteria฀for฀
gain฀recognition฀are฀not฀met,฀we฀defer฀the฀gain฀to฀the฀extent฀
we฀have฀a฀remaining฀financial฀exposure฀in฀connection฀with฀the฀
sales฀transaction.฀Deferred฀gains฀are฀recognized฀when฀the฀
gain฀recognition฀criteria฀are฀met฀or฀as฀our฀financial฀exposure฀
is฀reduced.฀When฀we฀make฀a฀decision฀to฀retain฀a฀store฀previ-
ously฀held฀for฀sale,฀we฀revalue฀the฀store฀at฀the฀lower฀of฀its฀
(a)฀net฀book฀ value฀ at฀our฀original฀sale฀decision฀date฀less฀
normal฀depreciation฀and฀amortization฀that฀would฀have฀been฀
recorded฀during฀the฀period฀held฀for฀sale฀or฀(b)฀its฀current฀fair฀
market฀value.฀This฀value฀becomes฀the฀store’s฀new฀cost฀basis.฀
We฀record฀any฀difference฀between฀the฀store’s฀carrying฀amount฀
and฀its฀new฀cost฀basis฀to฀refranchising฀gains฀(losses).฀When฀
we฀make฀a฀decision฀to฀close฀a฀store฀previously฀held฀for฀sale,฀
we฀reverse฀any฀previously฀recognized฀refranchising฀loss฀and฀
then฀record฀impairment฀and฀store฀closure฀costs฀as฀described฀
above.฀Refranchising฀gains฀(losses)฀also฀include฀charges฀for฀
estimated฀exposures฀related฀to฀those฀partial฀guarantees฀of฀
franchisee฀loan฀pools฀and฀contingent฀lease฀liabilities฀which฀
arose฀from฀refranchising฀activities.฀These฀exposures฀are฀more฀
fully฀discussed฀in฀Note฀24.
Considerable฀ management฀ judgment฀ is฀ necessary฀
to฀ estimate฀ future฀ cash฀ flows,฀ including฀ cash฀ flows฀ from฀
continuing฀use,฀terminal฀value,฀closure฀costs,฀sublease฀income฀
and฀refranchising฀proceeds.฀Accordingly,฀actual฀results฀could฀
vary฀significantly฀from฀our฀estimates.
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.
Considerable฀ management฀ judgment฀ is฀ necessary฀ to฀
estimate฀future฀cash฀flows.฀Accordingly,฀actual฀results฀could฀
vary฀significantly฀from฀our฀estimates.
Asset฀ Retirement฀ Obligations฀ Effective฀ December฀29,฀
2002,฀ the฀ Company฀ adopted฀ SFAS฀No.฀143,฀ “Accounting฀
for฀Asset฀Retirement฀Obligations”฀(“SFAS฀143”).฀SFAS฀143฀
addresses฀the฀financial฀accounting฀and฀reporting฀for฀legal฀
obligations฀associated฀with฀the฀retirement฀of฀tangible฀long-
lived฀assets฀and฀the฀associated฀asset฀retirement฀costs.฀As฀
a฀result฀of฀obligations฀under฀certain฀leases฀that฀are฀within฀
the฀scope฀of฀SFAS฀143,฀the฀Company฀recorded฀a฀cumulative฀
effect฀adjustment฀of฀$2฀million฀($1฀million฀after฀tax)฀which฀did฀
not฀have฀a฀material฀effect฀on฀diluted฀earnings฀per฀common฀
share.฀The฀adoption฀of฀SFAS฀143฀also฀did฀not฀have฀a฀material฀
impact฀ on฀ our฀ Consolidated฀ Financial฀ Statements฀ for฀ the฀
years฀ended฀December฀25,฀2004฀or฀December฀27,฀2003.฀If฀
SFAS฀143฀had฀been฀adopted฀as฀of฀the฀beginning฀of฀2002,฀the฀
cumulative฀effect฀adjustment฀would฀not฀have฀been฀materially฀
different฀from฀that฀recorded฀on฀December฀29,฀2002.
Guarantees฀ The฀Company฀has฀adopted฀FASB฀Interpretation฀
No.฀45,฀“Guarantor’s฀Accounting฀and฀Disclosure฀Requirements฀
for฀Guarantees,฀Including฀Indirect฀Guarantees฀of฀Indebtedness฀
to฀Others,฀an฀ interpretation฀of฀FASB฀ Statements฀No.฀5,฀57฀
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Yum!฀Brands,฀Inc.