Pizza Hut 2006 Annual Report Download - page 55

60 YUM! BRANDS, INC.
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 production 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 advertis-
ing cooperatives, we expense our contributions as incurred.
Our advertising expenses were $492 million, $497 million and
$458 million in 2006, 2005 and 2004, respectively. We report
substantially 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, $33 million and $26 million in 2006, 2005 and
2004, respectively.
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 recoverable. We evaluate restaurants using
a “two-year history of operating losses” as our primary indicator
of potential impairment. 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 restaurant it is
reviewed for impairment and depreciable lives are adjusted based
on the expected disposal date. The impairment 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 oper-
ating 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 (income).
Refranchising (gain) loss 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 initiatives, we most often offer groups
of restaurants. We classify restaurants as held for sale and sus-
pend 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 estimated
losses on refranchisings when the restaurants are classified as
held for sale. We also recognize as refranchising loss impair-
ment 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 obligations. 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, or group of stores, 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 refranchising gain (loss).
Considerable management judgment is necessary to esti-
mate future cash flows, including cash flows from continuing
use, terminal value, sublease income and refranchising pro-
ceeds. Accordingly, actual results could vary significantly from
our estimates.
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 fair 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.
We recorded no impairment associated with our investments in
unconsolidated affiliates during the years ended December 30,
2006, December 31, 2005 and December 25, 2004.
Considerable management judgment is necessary to esti-
mate future cash flows. Accordingly, actual results could vary
significantly from our estimates.
GUARANTEES We account for certain guarantees in accor-
dance with FASB Interpretation No. 45, “Guarantor’s Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpre-
tation No. 34” (“FIN 45”). FIN 45 elaborates on the disclosures
to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. FIN
45 also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of certain
obligations undertaken.
We have also issued guarantees as a result of assigning
our interest in obligations under operating leases as a condi-
tion 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
guarantees under SFAS 145 upon refranchising and upon any
subsequent renewals of such leases when we remain contin-
gently liable. The related expense in both instances is included
in refranchising gain (loss).