Pizza Hut 2005 Annual Report Download - page 56

sions฀for฀uncollectible฀franchise฀and฀license฀receivables฀of฀
$3฀million฀ and฀ $1฀million฀ were฀ included฀ in฀ franchise฀ and฀
license฀expense฀in฀2005฀and฀2004,฀respectively.฀Included฀in฀
franchise฀and฀license฀expense฀in฀2003฀was฀a฀net฀benefit฀for฀
uncollectible฀franchise฀and฀license฀receivables฀of฀$3฀million,฀
as฀we฀were฀able฀to฀recover฀previously฀reserved฀receivables฀
in฀excess฀of฀current฀provisions.
Revenue฀ Recognition฀ Our฀ revenues฀ consist฀ of฀ sales฀ by฀
Company฀operated฀restaurants฀and฀fees฀from฀our฀franchi-
sees฀ and฀ licensees.฀ Revenues฀ from฀ Company฀ operated฀
restaurants฀are฀recognized฀ when฀ payment฀ is฀tendered฀ at฀
the฀time฀of฀sale.฀We฀recognize฀initial฀fees฀received฀from฀a฀
franchisee฀or฀licensee฀as฀revenue฀when฀we฀have฀performed฀
substantially฀all฀initial฀services฀required฀by฀the฀franchise฀or฀
license฀agreement,฀which฀is฀generally฀upon฀the฀opening฀of฀a฀
store.฀We฀recognize฀continuing฀fees฀based฀upon฀a฀percentage฀
of฀franchisee฀and฀licensee฀sales฀as฀earned.฀We฀recognize฀
renewal฀fees฀when฀a฀renewal฀agreement฀with฀a฀franchisee฀or฀
licensee฀becomes฀effective.฀We฀include฀initial฀fees฀collected฀
upon฀the฀sale฀of฀a฀restaurant฀to฀a฀franchisee฀in฀refranchising฀
gains฀(losses).
Direct฀Marketing฀Costs฀ We฀charge฀direct฀marketing฀costs฀
to฀expense฀ratably฀in฀relation฀to฀revenues฀over฀the฀year฀in฀
which฀incurred฀and,฀in฀the฀case฀ of฀advertising฀production฀
costs,฀in฀the฀year฀the฀advertisement฀is฀first฀shown.฀Deferred฀
direct฀ marketing฀ costs,฀ which฀ are฀ classified฀ as฀ prepaid฀
expenses,฀consist฀of฀media฀and฀related฀advertising฀produc-
tion฀costs฀which฀will฀generally฀be฀used฀for฀the฀first฀time฀in฀
the฀next฀fiscal฀year฀and฀have฀historically฀not฀been฀significant.฀
To฀ the฀ extent฀ we฀ participate฀ in฀ advertising฀ cooperatives,฀
we฀expense฀our฀contributions฀as฀incurred.฀Our฀advertising฀
expenses฀were฀$497฀million,฀$458฀million฀and฀$419฀million฀
in฀2005,฀2004฀and฀2003,฀respectively.฀We฀report฀substan-
tially฀all฀of฀our฀direct฀marketing฀costs฀in฀occupancy฀and฀other฀
operating฀expenses.
Research฀ and฀ Development฀ Expenses฀ Research฀ and฀
development฀ expenses,฀ which฀ we฀ expense฀ as฀ incurred,฀
are฀reported฀in฀G&A฀expenses.฀Research฀and฀development฀
expenses฀were฀$33฀million฀in฀2005฀and฀$26฀million฀in฀both฀
2004฀and฀2003.
Impairment฀ or฀ Disposal฀ of฀ Long-Lived฀ Assets฀ In฀ accor-
dance฀with฀SFAS฀No.฀144,฀“Accounting฀for฀the฀Impairment฀
or฀Disposal฀of฀Long-Lived฀Assets”฀(“SFAS฀144”),฀we฀review฀
our฀long-lived฀assets฀related฀to฀each฀restaurant฀to฀be฀held฀
and฀used฀in฀the฀business,฀including฀any฀allocated฀intangible฀
assets฀subject฀to฀amortization,฀semi-annually฀for฀impairment,฀
or฀whenever฀events฀or฀changes฀in฀circumstances฀indicate฀
that฀the฀carrying฀amount฀of฀a฀restaurant฀may฀not฀be฀recover-
able.฀We฀evaluate฀restaurants฀using฀a฀“two-year฀history฀of฀
operating฀losses”฀as฀our฀primary฀indicator฀of฀potential฀impair-
ment.฀Based฀on฀the฀best฀information฀available,฀we฀write฀down฀
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.
We฀account฀for฀exit฀or฀disposal฀activities,฀including฀store฀
closures,฀in฀ accordance฀with฀ SFAS฀ No.฀146,฀ “Accounting฀
for฀ Costs฀ Associated฀ with฀ Exit฀ or฀ Disposal฀ Activities”฀
(“SFAS฀146”).฀Store฀closure฀costs฀include฀costs฀of฀disposing฀
of฀the฀assets฀as฀well฀as฀other฀facility-related฀expenses฀from฀
previously฀ 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.฀Any฀
subsequent฀adjustments฀to฀that฀liability฀as฀a฀result฀of฀lease฀
termination฀or฀changes฀in฀estimates฀of฀sublease฀income฀are฀
recorded฀in฀store฀closure฀costs.฀To฀the฀extent฀we฀sell฀assets,฀
primarily฀land,฀associated฀with฀a฀closed฀store,฀any฀gain฀or฀
loss฀upon฀that฀sale฀is฀also฀recorded฀in฀store฀closure฀costs.
Refranchising฀ gains฀ (losses)฀ includes฀ the฀ gains฀ or฀
losses฀from฀the฀sales฀of฀our฀restaurants฀to฀new฀and฀existing฀
franchisees฀and฀the฀related฀initial฀franchise฀fees,฀reduced฀
by฀transaction฀costs.฀In฀executing฀our฀refranchising฀initia-
tives,฀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฀esti-
mated฀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฀transaction฀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฀obliga-
tions.฀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฀previously฀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฀refran-
chising฀ gains฀ (losses).฀ 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฀21.
Considerable฀ management฀ judgment฀ is฀ necessary฀
to฀ estimate฀ future฀ cash฀ flows,฀ including฀ cash฀ flows฀ from฀
continuing฀use,฀terminal฀value,฀sublease฀income฀and฀refran-
60.฀ ฀ ฀ |฀ ฀ ฀ Yum!฀Brands,฀Inc.