Pizza Hut 2004 Annual Report Download - page 56

and฀ 107฀ and฀ a฀ rescission฀ of฀ FASB฀ Interpretation฀ No.฀34”฀
(“FIN฀45”).฀FIN฀45฀elaborates฀on฀the฀disclosures฀to฀be฀made฀
by฀a฀guarantor฀in฀its฀interim฀and฀annual฀financial฀statements฀
about฀its฀obligations฀under฀guarantees฀issued.฀FIN฀45฀also฀
clarifies฀that฀a฀guarantor฀is฀required฀to฀recognize,฀at฀inception฀
of฀a฀guarantee,฀a฀liability฀for฀the฀fair฀value฀of฀certain฀obliga-
tions฀undertaken.฀The฀initial฀recognition฀and฀measurement฀
provisions฀were฀applicable฀to฀certain฀guarantees฀issued฀or฀
modified฀after฀December฀31,฀2002.฀While฀the฀nature฀of฀our฀
business฀results฀in฀the฀issuance฀of฀certain฀guarantees฀from฀
time฀to฀time,฀the฀adoption฀of฀FIN฀45฀did฀not฀have฀a฀material฀
impact฀ on฀ our฀ Consolidated฀ Financial฀ Statements฀ for฀ the฀
years฀ended฀December฀25,฀2004฀or฀December฀27,฀2003.
We฀have฀also฀issued฀guarantees฀as฀a฀result฀of฀assigning฀
our฀ interest฀ in฀ obligations฀ under฀ operating฀ leases฀ as฀ a฀
condition฀ to฀ the฀ refranchising฀ of฀ certain฀ Company฀ restau-
rants.฀Such฀guarantees฀are฀subject฀to฀the฀requirements฀of฀
SFAS฀No.฀145,฀“Rescission฀ of฀ FASB฀Statements฀ No.฀4,฀44,฀
and฀64,฀Amendment฀of฀FASB฀Statement฀No.฀13,฀and฀Technical฀
Corrections”฀(“SFAS฀145”).฀We฀recognize฀a฀ liability฀for฀the฀
fair฀value฀of฀such฀lease฀guarantees฀under฀SFAS฀145฀at฀their฀
inception,฀with฀the฀related฀expense฀being฀included฀in฀refran-
chising฀gains฀(losses).
Cash฀ and฀ Cash฀ Equivalents฀ Cash฀ equivalents฀ represent฀
funds฀we฀have฀temporarily฀invested฀(with฀original฀maturities฀
not฀exceeding฀three฀months)฀as฀part฀of฀managing฀our฀day-to-
day฀operating฀cash฀receipts฀and฀disbursements.
Inventories฀ We฀value฀our฀inventories฀at฀the฀lower฀of฀cost฀
(computed฀on฀the฀first-in,฀first-out฀method)฀or฀net฀realizable฀
value.
Property,฀Plant฀and฀Equipment฀ We฀state฀property,฀plant฀and฀
equipment฀at฀cost฀less฀accumulated฀depreciation฀and฀amor-
tization,฀impairment฀ writedowns฀and฀valuation฀allowances.฀
We฀calculate฀depreciation฀and฀amortization฀on฀a฀straight-line฀
basis฀over฀the฀estimated฀useful฀lives฀of฀the฀assets฀as฀follows:฀
5฀to฀25฀years฀for฀buildings฀and฀improvements,฀3฀to฀20฀years฀
for฀machinery฀and฀equipment฀and฀3฀to฀7฀years฀for฀capitalized฀
software฀costs.฀As฀discussed฀above,฀we฀suspend฀deprecia-
tion฀and฀amortization฀on฀assets฀related฀to฀restaurants฀that฀
are฀held฀for฀sale.
Leases฀ and฀ Leasehold฀ Improvements฀ We฀ account฀ for฀
our฀ leases฀ in฀ accordance฀ with฀ SFAS฀No.฀13,฀ “Accounting฀
for฀ Leases”฀ (“SFAS฀13”),฀ and฀ other฀ related฀ authoritative฀
guidance.฀When฀determining฀the฀lease฀term,฀we฀often฀include฀
option฀periods฀for฀which฀failure฀to฀renew฀the฀lease฀imposes฀
a฀penalty฀on฀the฀Company฀in฀such฀an฀amount฀that฀a฀renewal฀
appears,฀ at฀ the฀ inception฀ of฀ the฀ lease,฀ to฀ be฀ reasonably฀
assured.฀The฀primary฀penalty฀to฀which฀we฀are฀subject฀is฀the฀
economic฀detriment฀associated฀with฀the฀existence฀of฀lease-
hold฀improvements฀which฀might฀be฀impaired฀if฀we฀choose฀not฀
to฀continue฀the฀use฀of฀the฀leased฀property.
In฀ 2004,฀ we฀ recorded฀ an฀ adjustment,฀ similar฀ to฀ that฀
recorded฀ by฀ many฀ other฀ companies฀ within฀ our฀ industry,฀
such฀that฀all฀of฀our฀leasehold฀improvements฀are฀now฀being฀
depreciated฀ over฀ the฀ shorter฀ of฀ their฀ useful฀ lives฀ or฀ the฀
underlying฀ lease฀ term.฀ The฀ cumulative฀ adjustment฀ neces-
sary,฀primarily฀through฀increased฀U.S.฀depreciation฀expense,฀
totaled฀$11.5฀million฀($7฀million฀after฀tax).฀The฀portion฀of฀this฀
adjustment฀that฀related฀to฀the฀current฀year฀was฀approximately฀
$3฀million.฀As฀the฀ portion฀ of฀the฀adjustment฀recorded฀that฀
was฀a฀correction฀of฀errors฀in฀our฀prior฀period฀financial฀state-
ments฀was฀not฀material฀to฀any฀of฀those฀prior฀period฀financial฀
statements,฀we฀recorded฀the฀entire฀adjustment฀in฀our฀2004฀
Consolidated฀Financial฀Statements฀as฀increased฀occupancy฀
and฀other฀operating฀expenses.
We฀record฀rent฀expense฀for฀leases฀that฀contain฀scheduled฀
rent฀increases฀on฀a฀straight-line฀basis฀over฀the฀lease฀term,฀
including฀any฀option฀periods฀considered฀in฀the฀determination฀
of฀that฀lease฀term.฀Contingent฀rentals฀are฀generally฀based฀on฀
sales฀levels฀in฀excess฀of฀stipulated฀amounts,฀and฀thus฀are฀
not฀considered฀minimum฀lease฀payments฀and฀are฀included฀
in฀rent฀expense฀as฀they฀accrue.฀We฀capitalize฀rent฀associ-
ated฀with฀land฀that฀we฀are฀leasing฀while฀we฀are฀constructing฀
a฀restaurant.฀Such฀capitalized฀rent฀is฀then฀expensed฀ on฀a฀
straight-line฀basis฀over฀the฀remaining฀term฀of฀the฀lease฀upon฀
opening฀of฀the฀restaurant.฀We฀generally฀do฀not฀receive฀rent฀
holidays,฀rent฀concessions฀or฀leasehold฀improvement฀incen-
tives฀upon฀opening฀a฀store฀that฀is฀subject฀to฀a฀lease.
Internal฀Development฀Costs฀and฀Abandoned฀Site฀Costs฀ We฀
capitalize฀direct฀costs฀associated฀with฀the฀site฀acquisition฀and฀
construction฀of฀a฀Company฀unit฀on฀that฀site,฀including฀direct฀
internal฀ payroll฀ and฀ payroll-related฀ costs.฀ Only฀ those฀ site-
specific฀costs฀incurred฀subsequent฀to฀the฀time฀that฀the฀site฀
acquisition฀is฀considered฀probable฀are฀capitalized.฀If฀we฀subse-
quently฀make฀a฀determination฀that฀a฀site฀for฀which฀internal฀
development฀costs฀have฀been฀capitalized฀will฀not฀be฀acquired฀
or฀developed,฀any฀previously฀capitalized฀internal฀development฀
costs฀are฀expensed฀and฀included฀in฀G&A฀expenses.
Goodwill฀ and฀ Intangible฀ Assets฀ The฀ Company฀ accounts฀
for฀acquisitions฀of฀restaurants฀from฀franchisees฀and฀other฀
acquisitions฀of฀business฀that฀may฀occur฀from฀time฀to฀time฀
in฀accordance฀with฀SFAS฀No.฀141,฀“Business฀Combinations”฀
(“SFAS฀141”).฀Goodwill฀in฀such฀acquisitions฀represents฀the฀
excess฀of฀the฀cost฀of฀a฀business฀acquired฀over฀the฀net฀of฀
the฀amounts฀assigned฀to฀assets฀acquired,฀including฀identi-
fiable฀intangible฀assets,฀and฀liabilities฀assumed.฀SFAS฀141฀
specifies฀criteria฀to฀be฀used฀in฀determining฀whether฀intan-
gible฀assets฀acquired฀in฀a฀business฀combination฀must฀be฀
recognized฀and฀reported฀separately฀from฀goodwill.฀We฀base฀
amounts฀assigned฀to฀goodwill฀and฀other฀identifiable฀intangible฀
assets฀on฀independent฀appraisals฀or฀internal฀estimates.
The฀Company฀accounts฀for฀recorded฀goodwill฀and฀other฀
intangible฀assets฀in฀accordance฀with฀SFAS฀No.฀142,฀“Goodwill฀
and฀Other฀Intangible฀Assets”฀(“SFAS฀142”).฀In฀accordance฀
with฀SFAS฀142,฀we฀do฀not฀amortize฀goodwill฀and฀indefinite-
lived฀intangible฀assets.฀We฀evaluate฀the฀remaining฀useful฀
life฀of฀an฀intangible฀asset฀that฀is฀not฀being฀amortized฀each฀
reporting฀ period฀ to฀determine฀whether฀events฀and฀ circum-
stances฀continue฀to฀support฀an฀indefinite฀useful฀life.฀If฀an฀
intangible฀asset฀that฀is฀not฀being฀amortized฀is฀subsequently฀
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