Pizza Hut 2007 Annual Report Download - page 68

72 YUM! BRANDS, INC.
Future minimum commitments and amounts to be received
as lessor or sublessor under non-cancelable leases are set forth
below:
Commitments Lease Receivables
Direct
Capital Operating Financing Operating
2008 $ 24 $ 462 $ 7 $ 41
2009 24 417 8 37
2010 62 381 8 35
2011 20 340 8 29
2012 20 300 8 24
Thereafter 240 1,986 58 124
$ 390 $ 3,886 $ 97 $ 290
At December 29, 2007 and December 30, 2006, the present
value of minimum payments under capital leases was $282 mil-
lion and $228 million, respectively. At December 29, 2007 and
December 30, 2006, unearned income associated with direct
financing lease receivables was $46 million and $24 million,
respectively.
The details of rental expense and income are set forth
below:
2007 2006 2005
Rental expense
Minimum $ 474 $ 412 $ 380
Contingent 81 62 51
$ 555 $ 474 $ 431
Minimum rental income $ 23 $ 21 $ 24
15.
Financial Instruments
INTEREST RATE DERIVATIVE INSTRUMENTS We enter into
interest rate swaps with the objective of reducing our exposure
to interest rate risk and lowering interest expense for a portion
of our debt. Under the contracts, we agree with other parties to
exchange, at specified intervals, the difference between variable
rate and fixed rate amounts calculated on a notional principal
amount. At both December 29, 2007 and December 30, 2006,
interest rate derivative instruments outstanding had notional
amounts of $850 million. These swaps have reset dates and
floating rate indices which match those of our underlying fixed-rate
debt and have been designated as fair value hedges of a portion
of that debt. As the swaps qualify for the short-cut method under
SFAS 133, no ineffectiveness has been recorded. The fair value
of these swaps as of December 29, 2007 was a net asset of
approximately $15 million, of which $16 million and $1 million
were included in Other assets and Other liabilities and deferred
credits, respectively. The fair value of these swaps as of Decem-
ber 30, 2006 was a liability of approximately $15 million, which
were included in Other liabilities and deferred credits. The portion
of this fair value which has not yet been recognized as an addition
to interest expense at December 29, 2007 and December 30,
2006 has been included as an addition of $17 million and a
reduction of $13 million, respectively, to long-term debt.
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS We enter into
foreign currency forward contracts with the objective of reducing
our exposure to cash flow volatility arising from foreign currency
fluctuations associated with certain foreign currency denominated
intercompany short-term receivables and payables. The notional
amount, maturity date, and currency of these contracts match
those of the underlying receivables or payables. For those foreign
currency exchange forward contracts that we have designated
as cash flow hedges, we measure ineffectiveness by comparing
the cumulative change in the forward contract with the cumula-
tive change in the hedged item. No material ineffectiveness was
recognized in 2007, 2006 or 2005 for those foreign currency
forward contracts designated as cash flow hedges.
DEFERRED AMOUNTS IN ACCUMULATED OTHER COMPREHEN-
SIVE INCOME (LOSS) As of December 29, 2007, we had a net
deferred loss associated with cash flow hedges of approximately
$10 million, net of tax, due to treasury locks, forward starting inter-
est rate swaps and foreign currency forward contracts. The vast
majority of this loss arose from the settlement of forward starting
interest rate swaps entered into prior to the issuance of our Senior
Unsecured Notes due in 2037, and is being reclassified into earn-
ings through 2037 to interest expense. See Note 13 for further
discussion of these forward starting interest rate swaps.
CREDIT RISKS Credit risk from interest rate swaps and foreign
currency forward contracts is dependent both on movement in
interest and currency rates and the possibility of non-payment
by counterparties. We mitigate credit risk by entering into these
agreements with high-quality counterparties, and settle both inter-
est rate swaps and foreign currency forward contracts for the
net of our payable and receivable with the counterparty under
the agreement.
Accounts receivable consists primarily of amounts due from
franchisees and licensees for initial and continuing fees. In addi-
tion, we have notes and lease receivables from certain of our
franchisees. The financial condition of these franchisees and
licensees is largely dependent upon the underlying business
trends of our Concepts. This concentration of credit risk is miti-
gated, in part, by the large number of franchisees and licensees
of each Concept and the short-term nature of the franchise and
license fee receivables.
FAIR VALUE At December 29, 2007 and December 30, 2006,
the fair values of cash and cash equivalents, accounts receiv-
able and accounts payable approximated their carrying values
because of the short-term nature of these instruments. The fair
value of notes receivable approximates the carrying value after
consideration of recorded allowances.