Pizza Hut 2007 Annual Report Download - page 59

63
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
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 as well. 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
(income) costs.
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. When we have offered to refranchise stores or
groups of stores for a price less than their carrying value, but do
not believe the store(s) have met the criteria to be classified as
held for sale, we recognize impairment at the offer date for any
excess of carrying value over the expected sales proceeds plus
holding period cash flows, if any. Such impairment is classified
as refranchising loss. We recognize gains on restaurant refran-
chisings 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 recog-
nized 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 resulting 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 29,
2007, December 30, 2006 and December 31, 2005.
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 accordance
with Financial Accounting Standards Board (“FASB”) Interpreta-
tion (“FIN”) 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 Interpretation 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 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 guarantees
under SFAS 145 upon refranchising and upon any subsequent
renewals of such leases when we remain contingently liable. The
related expense in both instances is included in refranchising
(gain) loss.
INCOME TAXES We account for income taxes in accordance
with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”).
Under SFAS 109, we record deferred tax assets and liabilities
for the future tax consequences attributable to temporary dif-
ferences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those differences
are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. In addi-
tion, a valuation allowance is recorded to reduce the carrying
amount of deferred tax assets if it is more likely than not all or a
portion of the asset will not be realized.
Effective December 31, 2006, we adopted FASB Interpreta-
tion No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
48”), an interpretation of SFAS 109. FIN 48 requires that a posi-
tion taken or expected to be taken in a tax return be recognized
in the financial statements when it is more likely than not (i.e. a
likelihood of more than fifty percent) that the position would be
sustained upon examination by tax authorities. A recognized tax
position is then measured at the largest amount of benefit that
is greater than fifty percent likely of being realized upon settle-
ment. FIN 48 also requires that changes in judgment that result
in subsequent recognition, derecognition or change in a measure-
ment of a tax position taken in a prior annual period (including
any related interest and penalties) be recognized as a discrete
item in the interim period in which the change occurs. Prior to
adopting FIN 48, we provided reserves for potential exposures