Pizza Hut 2005 Annual Report Download - page 58

construction฀periods฀beginning฀January฀1,฀2006฀and฀there-
after,฀whether฀paid฀or฀subject฀to฀a฀rent฀holiday,฀in฀accordance฀
with฀the฀FASB฀Staff฀Position฀No.฀13-1,฀“Accounting฀for฀Rental฀
Costs฀Incurred฀during฀a฀Construction฀Period”฀(“FSP฀13-1”).฀
We฀do฀not฀anticipate฀that฀the฀adoption฀of฀FSP฀13-1฀will฀signif-
icantly฀impact฀our฀results฀of฀operations.
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฀subsequently฀make฀a฀ determination฀that฀a฀site฀ for฀
which฀ internal฀development฀ costs฀ have฀ been฀ capitalized฀
will฀not฀be฀acquired฀or฀developed,฀any฀previously฀capital-
ized฀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฀
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.฀The฀weighted฀average฀useful฀life฀of฀our฀
amortizable฀franchise฀contract฀rights฀and฀our฀amortizable฀
trademarks/brands฀is฀33฀years฀and฀30฀years,฀respectively.฀
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฀ impairment฀ testing.฀ Our฀ reporting฀ units฀ are฀ our฀ oper-
ating฀segments฀in฀the฀U.S.฀(see฀Note฀20)฀and฀our฀business฀
management฀units฀internationally฀(typically฀individual฀coun-
tries).฀Goodwill฀impairment฀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฀trans-
action฀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฀begin-
ning฀of฀our฀fourth฀quarter฀as฀the฀date฀on฀which฀to฀perform฀
our฀ongoing฀annual฀impairment฀test฀for฀goodwill.฀For฀2005,฀
2004฀and฀2003,฀there฀was฀no฀impairment฀of฀goodwill฀identi-
fied฀during฀our฀annual฀impairment฀testing.
For฀ indefinite-lived฀intangible฀ assets,฀our฀impairment฀
test฀consists฀of฀a฀comparison฀of฀the฀fair฀value฀of฀an฀intan-
gible฀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฀indefi-
nite-lived฀intangible฀assets฀at฀the฀beginning฀of฀our฀fourth฀
quarter.฀As฀discussed฀in฀Note฀9,฀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฀intangible฀assets฀
was฀recorded฀in฀2005฀or฀2004.
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.
Share-Based฀ Employee฀ Compensation฀ In฀ the฀ four th฀
quarter฀ 2005,฀ the฀ Company฀ adopted฀ SFAS฀ No.฀ 123฀
(Revised฀2004),฀“Share-Based฀Payment”฀(“SFAS฀123R”),฀
which฀ replaces฀ SFAS฀No.฀ 123฀ “Accounting฀ for฀ Stock-
Based฀Compensation”฀(“SFAS฀123”),฀supersedes฀APB฀25,฀
“Accounting฀for฀ Stock฀Issued฀ to฀Employees”฀and฀related฀
interpretations฀ and฀ amends฀ SFAS฀No.฀95,฀ “Statement฀
of฀Cash฀Flows.”฀The฀provisions฀of฀SFAS฀123R฀are฀similar฀
to฀ those฀ of฀ SFAS฀123,฀ however,฀ SFAS฀123R฀ requires฀ all฀
new,฀ modified฀ and฀ unvested฀ share-based฀ payments฀ to฀
employees,฀including฀grants฀of฀employee฀stock฀options฀and฀
restricted฀stock,฀be฀recognized฀in฀the฀financial฀statements฀
as฀ compensation฀cost฀ over฀the฀service฀period฀ based฀on฀
their฀fair฀value฀on฀the฀date฀of฀grant.฀Compensation฀cost฀is฀
recognized฀over฀the฀service฀period฀on฀a฀straight-line฀basis฀
for฀the฀fair฀value฀of฀awards฀that฀actually฀vest.
62.฀ ฀ ฀ |฀ ฀ ฀ Yum!฀Brands,฀Inc.