Pizza Hut 2005 Annual Report Download - page 55

We฀participate฀in฀various฀advertising฀cooperatives฀with฀
our฀franchisees฀and฀licensees.฀In฀certain฀of฀these฀coopera-
tives฀we฀possess฀majority฀voting฀rights,฀and฀thus฀control฀the฀
cooperatives.฀We฀report฀all฀assets฀and฀liabilities฀of฀these฀
advertising฀cooperatives฀that฀we฀consolidate฀as฀advertising฀
cooperative฀ assets,฀ restricted฀ and฀ advertising฀ coopera-
tive฀liabilities฀in฀the฀Consolidated฀Balance฀Sheet.฀As฀the฀
contributions฀ to฀ these฀ cooperatives฀ are฀ designated฀ and฀
segregated฀for฀advertising,฀we฀act฀as฀an฀agent฀for฀the฀fran-
chisees฀and฀licensees฀with฀regard฀to฀these฀contributions.฀
Thus,฀in฀accordance฀with฀Statement฀of฀Financial฀Accounting฀
Standards฀(“SFAS”)฀No.฀45,฀“Accounting฀for฀Franchise฀Fee฀
Revenue,”฀we฀do฀not฀reflect,฀and฀have฀not฀reflected฀in฀the฀
past,฀franchisee฀and฀licensee฀contributions฀to฀these฀coop-
eratives฀in฀our฀Consolidated฀Statements฀of฀Income.
In฀2004,฀we฀adopted฀Financial฀Accounting฀Standards฀฀
Board฀(“FASB”)฀Interpretation฀No.฀46฀(revised฀December฀2003),฀
“Consolidation฀of฀Variable฀Interest฀Entities,฀an฀interpreta-
tion฀of฀ARB฀No.฀51”฀(“FIN฀46R”).฀FIN฀46R฀addresses฀the฀
consolidation฀ of฀ an฀ entity฀ whose฀ equity฀ holders฀ either฀
(a)฀have฀not฀provided฀sufficient฀equity฀at฀risk฀to฀allow฀the฀
entity฀to฀finance฀its฀own฀activities฀ or฀(b)฀do฀not฀possess฀
certain฀characteristics฀of฀ a฀ controlling฀financial฀interest.฀
FIN฀46R฀requires฀the฀consolidation฀of฀such฀an฀entity,฀known฀
as฀a฀variable฀interest฀entity฀(“VIE”),฀by฀the฀primary฀benefi-
ciary฀of฀the฀entity.฀The฀primary฀beneficiary฀is฀the฀entity,฀if฀
any,฀that฀is฀obligated฀to฀absorb฀a฀majority฀of฀the฀risk฀of฀loss฀
from฀the฀VIE’s฀activities,฀entitled฀to฀receive฀a฀majority฀of฀the฀
VIE’s฀residual฀returns,฀or฀both.฀FIN฀46R฀excludes฀from฀its฀
scope฀businesses฀(as฀defined฀by฀FIN฀46R)฀unless฀certain฀
conditions฀exist.
The฀principal฀entities฀in฀which฀we฀possess฀a฀variable฀
interest฀include฀franchise฀entities,฀including฀our฀unconsoli-
dated฀ affiliates฀described฀ above.฀ We฀do฀not฀ possess฀ any฀
ownership฀ interests฀ in฀ franchise฀ entities฀ except฀ for฀ our฀
investments฀in฀various฀unconsolidated฀affiliates฀accounted฀
for฀under฀the฀equity฀method.฀Additionally,฀we฀generally฀do฀
not฀provide฀financial฀support฀to฀franchise฀entities฀in฀a฀typical฀
franchise฀relationship.
We฀also฀possess฀variable฀interests฀in฀certain฀purchasing฀
cooperatives฀ we฀ have฀ formed฀ along฀ with฀ representatives฀
of฀the฀ franchisee฀groups฀ of฀each฀of฀our฀Concepts.฀These฀
purchasing฀ cooperatives฀ were฀ formed฀ for฀ the฀ purpose฀ of฀
purchasing฀certain฀restaurant฀products฀and฀equipment฀in฀the฀
U.S.฀Our฀equity฀ownership฀in฀each฀cooperative฀is฀generally฀
proportional฀to฀our฀percentage฀ownership฀of฀the฀U.S.฀system฀
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฀31,฀2005฀or฀December฀25,฀2004.
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฀53rd฀week฀is฀added฀every฀five฀
or฀six฀years.฀Fiscal฀year฀2005฀included฀53฀weeks.฀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.฀In฀
fiscal฀year฀2005,฀the฀53rd฀week฀added฀$96฀million฀to฀total฀
revenues฀ and฀ $23฀million฀ to฀ total฀ operating฀ profit฀ in฀ our฀
Consolidated฀Statement฀of฀Income.฀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฀all฀of฀our฀international฀businesses฀except฀China.฀
The฀international฀businesses฀except฀China฀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฀
classification฀for฀the฀fiscal฀year฀ended฀December฀31,฀2005.฀
These฀reclassifications฀had฀no฀effect฀on฀previously฀reported฀
net฀income.
Specifically,฀ we฀ have฀ reclassified฀ distributions฀ from฀
unconsolidated฀affiliates฀from฀investing฀activities฀to฀operating฀
activities฀on฀ the฀Consolidated฀Statements฀ of฀Cash฀ Flows฀
for฀2004฀and฀2003.฀These฀distributions฀represent฀returns฀
on฀ equity฀ investments,฀ and฀ therefore฀ have฀ been฀ reclas-
sified฀ in฀ accordance฀ with฀ the฀ provisions฀ of฀ SFAS฀No.฀95,฀
“Statement฀ of฀ Cash฀Flows.”฀ There฀ was฀no฀ impact฀on฀ the฀
previously฀reported฀Consolidated฀Statements฀of฀Income฀or฀
Consolidated฀Balance฀Sheets฀as฀a฀result฀of฀the฀reclassifica-
tions.฀The฀reclassifications฀increased฀net฀cash฀provided฀by฀
operating฀activities฀in฀the฀Consolidated฀Statements฀of฀Cash฀
Flows฀by฀$55฀million฀and฀$46฀million฀for฀the฀years฀ended฀
2004฀and฀2003,฀respectively.
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฀intan-
gible฀assets฀and฀certain฀other฀direct฀incremental฀franchise฀
and฀license฀support฀costs.
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฀
determination,฀ the฀ ultimate฀ recovery฀ of฀ recorded฀ receiv-
ables฀is฀also฀dependent฀upon฀future฀economic฀events฀and฀
other฀conditions฀that฀may฀be฀beyond฀our฀control.฀Net฀provi-
Yum!฀Brands,฀Inc.฀ ฀ ฀ |฀ ฀ ฀ 59.