Pizza Hut 2004 Annual Report Download - page 57

determined฀ to฀ have฀ a฀ finite฀ useful฀ life,฀ we฀ amortize฀ the฀
intangible฀asset฀prospectively฀over฀its฀estimated฀remaining฀
useful฀life.฀Amortizable฀intangible฀assets฀are฀amortized฀on฀
a฀straight-line฀basis฀over฀3฀to฀40฀years.฀As฀discussed฀above,฀
we฀suspend฀amortization฀on฀those฀intangible฀assets฀with฀a฀
defined฀life฀that฀are฀allocated฀to฀restaurants฀that฀are฀held฀
for฀sale.
In฀accordance฀with฀the฀requirements฀of฀SFAS฀142,฀goodwill฀
has฀been฀assigned฀to฀reporting฀units฀for฀purposes฀of฀impair-
ment฀testing.฀Our฀reporting฀units฀are฀our฀operating฀segments฀
in฀the฀U.S.฀(see฀Note฀23)฀and฀our฀business฀management฀units฀
internationally฀(typically฀individual฀countries).฀Goodwill฀impair-
ment฀tests฀consist฀of฀a฀comparison฀of฀each฀reporting฀unit’s฀
fair฀value฀with฀its฀carrying฀value.฀The฀fair฀value฀of฀a฀reporting฀
unit฀is฀an฀estimate฀ of฀ the฀amount฀for฀which฀the฀unit฀as฀a฀
whole฀could฀be฀sold฀in฀a฀current฀transaction฀between฀willing฀
parties.฀We฀generally฀estimate฀fair฀value฀based฀on฀discounted฀
cash฀flows.฀If฀the฀carrying฀value฀of฀a฀reporting฀unit฀exceeds฀
its฀fair฀value,฀goodwill฀is฀written฀down฀to฀its฀implied฀fair฀value.฀
We฀have฀selected฀the฀beginning฀of฀our฀fourth฀quarter฀as฀the฀
date฀on฀which฀to฀perform฀our฀ongoing฀annual฀impairment฀test฀
for฀goodwill.฀For฀2004฀and฀2003,฀there฀was฀no฀impairment฀
of฀goodwill฀identified฀during฀our฀annual฀impairment฀testing.฀
For฀2002,฀goodwill฀assigned฀to฀the฀Pizza฀Hut฀France฀reporting฀
unit฀ was฀ deemed฀ impaired฀ and฀ written฀ off.฀ The฀ charge฀ of฀
$5฀million฀was฀recorded฀in฀facility฀actions.
For฀indefinite-lived฀intangible฀assets,฀our฀impairment฀test฀
consists฀of฀a฀comparison฀of฀the฀fair฀value฀of฀an฀intangible฀
asset฀with฀its฀carrying฀amount.฀Fair฀value฀is฀an฀estimate฀of฀
the฀price฀a฀willing฀buyer฀would฀pay฀for฀the฀intangible฀asset฀
and฀is฀generally฀estimated฀by฀discounting฀the฀expected฀future฀
cash฀ flows฀ associated฀ with฀ the฀ intangible฀ asset.฀ We฀ also฀
perform฀our฀annual฀test฀for฀impairment฀of฀our฀indefinite-lived฀
intangible฀assets฀at฀the฀beginning฀of฀our฀fourth฀quarter.฀Our฀
indefinite-lived฀intangible฀assets฀consist฀of฀values฀assigned฀
to฀certain฀trademarks/brands฀we฀have฀acquired.฀When฀deter-
mining฀the฀fair฀value,฀we฀limit฀assumptions฀about฀important฀
factors฀such฀as฀sales฀growth฀to฀those฀that฀are฀supportable฀
based฀on฀our฀plans฀for฀the฀trademark/brand.฀As฀discussed฀in฀
Note฀12,฀we฀recorded฀a฀$5฀million฀charge฀in฀2003฀as฀a฀result฀
of฀the฀impairment฀of฀an฀indefinite-lived฀intangible฀asset.฀This฀
charge฀ was฀ recorded฀ in฀facility฀actions.฀ No฀ impairment฀ of฀
indefinite-lived฀intangibles฀was฀recorded฀in฀2004฀or฀2002.
Stock-Based฀ Employee฀ Compensation฀ At฀ December฀25,฀
2004,฀the฀Company฀had฀four฀stock-based฀employee฀compen-
sation฀plans฀in฀effect,฀which฀are฀described฀more฀fully฀in฀Note฀
18.฀The฀Company฀accounts฀for฀those฀plans฀under฀the฀recog-
nition฀and฀measurement฀principles฀of฀Accounting฀Principles฀
Board฀ Opinion฀ No.฀25,฀ “Accounting฀ for฀ Stock฀ Issued฀ to฀
Employees”฀(“APB฀25”),฀and฀related฀Interpretations.฀No฀stock-
based฀employee฀compensation฀cost฀is฀reflected฀in฀net฀income฀
for฀options฀granted฀under฀these฀plans,฀as฀all฀such฀options฀
had฀an฀exercise฀price฀equal฀to฀the฀market฀value฀of฀the฀under-
lying฀common฀stock฀on฀the฀date฀of฀grant.฀The฀following฀table฀
illustrates฀the฀effect฀on฀net฀income฀and฀earnings฀per฀share฀if฀
the฀Company฀had฀applied฀the฀fair฀value฀recognition฀provisions฀
of฀SFAS฀No.฀123,฀“Accounting฀for฀Stock-Based฀Compensation”฀
(“SFAS฀123”),฀to฀stock-based฀employee฀compensation.
฀2004฀ 2003฀ 2002
Net฀Income,฀as฀reported฀ $฀ 740฀ $฀ 617฀ $฀ 583
Deduct:฀Total฀stock-based฀employee฀฀
฀ compensation฀expense฀determined฀฀
฀ under฀fair฀value฀based฀method฀for฀฀
฀ all฀awards,฀net฀of฀related฀tax฀effects฀ ฀ (34)฀ ฀ (36)฀ ฀ (39)
Net฀income,฀pro฀forma฀ ฀ 706฀ ฀ 581฀ ฀ 544
Basic฀Earnings฀per฀Common฀Share
฀ As฀reported฀ $฀2.54฀ $฀2.10฀ $฀1.97
฀ Pro฀forma฀ ฀2.42฀ ฀1.98฀ ฀1.84
Diluted฀Earnings฀per฀Common฀Share
฀ As฀reported฀ $฀2.42฀ $฀2.02฀ $฀1.88
฀ Pro฀forma฀ ฀2.31฀ ฀1.91฀ ฀1.76
Derivative฀Financial฀Instruments฀ We฀do฀not฀use฀derivative฀
instruments฀for฀trading฀purposes฀and฀we฀have฀procedures฀in฀
place฀to฀monitor฀and฀control฀their฀use.฀Our฀use฀of฀derivative฀
instruments฀has฀ included฀ interest฀ rate฀ swaps฀ and฀collars,฀
treasury฀ locks฀ and฀ foreign฀ currency฀ forward฀ contracts.฀ In฀
addition,฀on฀a฀limited฀basis฀we฀utilize฀commodity฀futures฀and฀
options฀contracts.฀Our฀interest฀rate฀and฀foreign฀currency฀deriv-
ative฀contracts฀are฀entered฀into฀with฀financial฀institutions฀while฀
our฀commodity฀derivative฀contracts฀are฀exchange฀traded.
We฀account฀for฀these฀derivative฀financial฀instruments฀
in฀accordance฀with฀SFAS฀No.฀133,฀“Accounting฀for฀Derivative฀
Instruments฀ and฀ Hedging฀ Activities”฀ (“SFAS฀133”)฀ as฀
amended฀by฀SFAS฀No.฀149,฀“Amendment฀of฀Statement฀133฀on฀
Derivative฀Instruments฀and฀Hedging฀Activities”฀(“SFAS฀149”).฀
SFAS฀133฀requires฀that฀all฀derivative฀instruments฀be฀recorded฀
on฀the฀Consolidated฀Balance฀Sheet฀at฀fair฀value.฀The฀account-
ing฀for฀changes฀in฀the฀fair฀value฀(i.e.,฀gains฀or฀losses)฀of฀a฀
derivative฀instrument฀is฀dependent฀upon฀whether฀the฀deriva-
tive฀has฀been฀designated฀and฀qualifies฀as฀part฀of฀a฀hedging฀
relationship฀and฀further,฀on฀the฀type฀of฀hedging฀relationship.฀
For฀derivative฀instruments฀that฀are฀designated฀and฀qualify฀as฀
a฀fair฀value฀hedge,฀the฀gain฀or฀loss฀on฀the฀derivative฀instru-
ment฀as฀well฀as฀the฀offsetting฀gain฀or฀loss฀on฀the฀hedged฀item฀
attributable฀to฀the฀hedged฀risk฀are฀recognized฀in฀the฀results฀
of฀operations.฀For฀derivative฀instruments฀that฀are฀designated฀
and฀qualify฀as฀a฀cash฀flow฀hedge,฀the฀effective฀portion฀of฀the฀
gain฀or฀loss฀on฀the฀derivative฀instrument฀is฀reported฀as฀a฀com-
ponent฀of฀other฀comprehensive฀income฀(loss)฀and฀reclassified฀
into฀earnings฀in฀the฀same฀period฀or฀periods฀during฀which฀the฀
hedged฀transaction฀affects฀earnings.฀Any฀ineffective฀portion฀of฀
the฀gain฀or฀loss฀on฀the฀derivative฀instrument฀is฀recorded฀in฀the฀
results฀of฀operations฀immediately.฀For฀derivative฀instruments฀
not฀designated฀as฀hedging฀instruments,฀the฀gain฀or฀loss฀is฀
recognized฀in฀the฀results฀of฀operations฀immediately.฀See฀Note฀
16฀for฀a฀discussion฀of฀our฀use฀of฀derivative฀instruments,฀man-
agement฀of฀credit฀risk฀inherent฀in฀derivative฀instruments฀and฀
fair฀value฀information.
New฀ Accounting฀ Pronouncements฀ Not฀ Yet฀ Adopted฀ In฀
October฀ 2004,฀ the฀ FASB฀ ratified฀ the฀ consensus฀ reached฀
by฀the฀Emerging฀Issues฀ Task฀Force฀(“EITF”)฀ on฀Issue฀04-1฀
“Accounting฀for฀Preexisting฀Relationships฀between฀the฀Parties฀
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Yum!฀Brands,฀Inc.