Pizza Hut 2008 Annual Report Download - page 170

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Future cash flow estimates and the discount rate are the key assumptions when estimating the fair value of a reporting
unit. Future cash flows are based on our growth expectations relative to recent historical performance. These growth
expectations are based on assumptions for key performance indicators such as company sales, franchise and license fees
and restaurant profit and are consistent with our internal operating plans. The discount rate is our estimate of the required
rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a
reporting unit. We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash
flows.
We have two international reporting units that have experienced deteriorating operating performance over the past few
years. These reporting units have goodwill of $100 million and $36 million as of the end of 2008. The assumptions used
in determining fair value for these reporting units reflect our belief that the businesses are experiencing temporary
declines and that they will turn around. While these growth assumptions are consistent with our internal operating plans
and reflect what we believe are reasonable and achievable growth rates, failure to realize these growth rates could result in
future impairment of some or all of the recorded goodwill. Likewise, if we believe the risks inherent in the businesses
increase, the resulting change in the discount rate could result in future impairment of some or all of the recorded
goodwill.
See Note 2 for a further discussion of our policies regarding goodwill.
Allowances for Franchise and License Receivables/Lease Guarantees
We reserve a franchisee’s or licensee’s entire receivable balance based upon pre-defined aging criteria and upon the
occurrence of other events that indicate that we may not collect the balance due. As a result of reserving using this
methodology, we have an immaterial amount of receivables that are past due that have not been reserved for at December
27, 2008.
We have also issued certain guarantees as a result of assigning our interest in obligations under operating leases, primarily
as a condition to the refranchising of certain Company restaurants. Such guarantees are subject to the requirements of
Statement of Financial Accounting Standards (“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 fair value of a guarantee is the estimated amount at which the liability could be
settled in a current transaction between willing unrelated parties.
If payment on the guarantee becomes probable and estimable, we record a liability for our exposure under these lease
assignments and guarantees. At December 27, 2008, we have recorded an immaterial liability for our exposure which we
consider to be probable and estimable. The potential total exposure under such leases is significant, with approximately
$325 million representing the present value, discounted at our pre-tax cost of debt, of the minimum payments of the
assigned leases at December 27, 2008. Current franchisees are the primary lessees under the vast majority of these leases.
We generally have cross-default provisions with these franchisees that would put them in default of their franchise
agreement in the event of non-payment under the lease. We believe these cross-default provisions significantly reduce the
risk that we will be required to make payments under these leases and, historically, we have not been required to make
such payments in significant amounts.
See Note 2 for a further discussion of our policies regarding franchise and license operations.
See Note 14 for a further discussion of our lease guarantees.
Form 10-K