Pizza Hut 2005 Annual Report Download - page 42

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.
We฀often฀refranchise฀restaurants฀in฀groups฀and,฀there-
fore,฀perform฀such฀impairment฀evaluations฀at฀the฀group฀level.฀
Forecasted฀cash฀flows฀in฀such฀instances฀consist฀of฀estimated฀
holding฀period฀cash฀flows฀and฀the฀expected฀sales฀proceeds฀
less฀applicable฀transaction฀costs.฀Expected฀sales฀proceeds฀
are฀based฀on฀the฀most฀relevant฀of฀historical฀sales฀multiples฀
or฀bids฀from฀buyers,฀and฀have฀historically฀been฀reasonably฀
accurate฀estimations฀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฀
our฀semi-annual฀test฀for฀impairment฀of฀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฀invest-
ments฀in฀each฀of฀our฀unconsolidated฀affiliates฀are฀currently฀
significantly฀in฀excess฀of฀their฀carrying฀values.
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฀ have฀ recorded฀ intangible฀ assets฀ as฀ a฀ result฀ of฀
business฀acquisitions.฀These฀include฀trademark/brand฀intan-
gible฀assets฀for฀KFC,฀LJS฀and฀A&W.฀We฀believe฀the฀value฀of฀
a฀trademark/brand฀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฀trademark/brand.฀
We฀have฀determined฀that฀the฀KFC฀trademark/brand฀has฀an฀
indefinite฀life฀and฀therefore฀it฀is฀ not฀being฀amortized.฀Our฀
impairment฀test฀for฀the฀KFC฀trademark/brand฀consists฀of฀a฀
comparison฀of฀the฀fair฀value฀of฀the฀asset฀with฀its฀carrying฀
amount.฀Anticipated฀sales฀are฀the฀most฀important฀assumption฀
in฀determining฀the฀fair฀value฀of฀the฀KFC฀trademark/brand.
In฀determining฀the฀fair฀value฀of฀our฀reporting฀units฀and฀
the฀ KFC฀ trademark/brand,฀ we฀ limit฀ assumptions฀ about฀
important฀factors฀such฀as฀sales฀growth,฀margin฀and฀other฀
factors฀impacting฀the฀fair฀value฀calculation฀to฀those฀that฀are฀
supportable฀based฀upon฀our฀plans.฀For฀2005,฀there฀was฀no฀
impairment฀of฀goodwill฀or฀the฀KFC฀trademark/brand.
We฀have฀certain฀intangible฀assets,฀such฀as฀the฀LJS฀and฀
A&W฀trademark/brand฀intangible฀assets,฀franchise฀contract฀
rights฀and฀favorable฀operating฀leases,฀which฀are฀amortized฀
over฀their฀expected฀useful฀lives.฀We฀base฀the฀expected฀useful฀
lives฀of฀our฀trademark/brand฀intangible฀assets฀on฀a฀number฀
of฀factors฀including฀the฀competitive฀environment,฀our฀future฀
development฀plans฀for฀the฀applicable฀Concept฀and฀the฀level฀
of฀franchisee฀commitment฀to฀the฀Concept.฀We฀generally฀base฀
the฀expected฀useful฀lives฀of฀our฀franchise฀contract฀rights฀on฀
their฀respective฀contractual฀terms฀including฀renewals฀when฀
appropriate.฀We฀base฀the฀expected฀useful฀lives฀of฀our฀favor-
able฀operating฀leases฀on฀the฀remaining฀lease฀term.
Our฀ amortizable฀ intangible฀ assets฀ are฀ evaluated฀ for฀
impairment฀whenever฀events฀or฀changes฀in฀circumstances฀
indicate฀ that฀the฀carrying฀ amount฀of฀ the฀ intangible฀ asset฀
may฀not฀be฀recoverable.฀An฀intangible฀asset฀that฀is฀deemed฀
impaired฀is฀written฀down฀to฀its฀estimated฀fair฀value,฀which฀is฀
based฀on฀discounted฀cash฀flows.฀For฀purposes฀of฀our฀impair-
ment฀analysis,฀we฀update฀the฀cash฀flows฀that฀were฀initially฀
used฀to฀value฀the฀amortizable฀intangible฀asset฀to฀reflect฀our฀
current฀estimates฀and฀assumptions฀over฀the฀asset’s฀future฀
remaining฀life.
See฀ Note฀ 2฀ for฀ a฀ further฀ discussion฀ of฀ our฀ policies฀
regarding฀goodwill฀and฀intangible฀assets.
Allowances฀for฀Franchise฀and฀License฀Receivables/Lease฀
Guarantees฀ We฀reserve฀a฀franchisee’s฀or฀licensee’s฀entire฀
receivable฀balance฀based฀upon฀pre-defined฀aging฀criteria฀and฀
upon฀the฀occurrence฀of฀other฀events฀that฀indicate฀that฀we฀
may฀ not฀collect฀the฀balance฀due.฀As฀a฀result฀of฀reserving฀
using฀this฀methodology,฀we฀have฀an฀immaterial฀amount฀of฀
receivables฀that฀are฀past฀due฀that฀have฀not฀been฀reserved฀
for฀at฀December฀31,฀2005.
We฀ have฀ also฀ issued฀ certain฀ guarantees฀ as฀ a฀ result฀
of฀ assigning฀ our฀ interest฀ in฀ obligations฀ under฀ operating฀
leases,฀ primarily฀ as฀ a฀ condition฀ to฀ the฀ refranchising฀ of฀
certain฀Company฀restaurants.฀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฀guar-
antees฀under฀SFAS฀145฀upon฀refranchising฀and฀upon฀any฀
subsequent฀renewals฀of฀such฀leases฀when฀we฀remain฀contin-
gently฀liable.฀The฀fair฀value฀of฀a฀guarantee฀is฀the฀estimated฀
amount฀at฀which฀the฀liability฀could฀be฀settled฀in฀a฀current฀
transaction฀between฀willing฀parties.
If฀payment฀on฀the฀guarantee฀ever฀becomes฀probable฀and฀
estimable,฀we฀record฀a฀liability฀for฀our฀exposure฀under฀these฀
lease฀assignments฀and฀guarantees.฀At฀December฀31,฀2005,฀
we฀have฀recorded฀ an฀immaterial฀liability฀for฀our฀exposure฀
which฀we฀consider฀to฀be฀probable฀and฀estimable.฀The฀poten-
tial฀ total฀ exposure฀ under฀ such฀ leases฀ is฀ significant,฀ with฀
46.฀ ฀ ฀ |฀ ฀ ฀ Yum!฀Brands,฀Inc.