Pizza Hut 2008 Annual Report Download - page 172

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The losses our U.S. plan assets have experienced, along with a decrease in discount rates over time, have largely
contributed to an unrecognized pre-tax net loss of $374 million included in Accumulated other comprehensive income
(loss) for the U.S. plans at December 27, 2008. For purposes of determining 2008 expense, our funded status was such
that we recognized $6 million of net loss in net periodic benefit cost. We will recognize approximately $13 million of
such loss in 2009.
See Note 15 for further discussion of our pension and post-retirement plans.
Stock Options and Stock Appreciation Rights Expense
Compensation expense for stock options and stock appreciation rights (“SARs”) is estimated on the grant date using a
Black-Scholes option pricing model. Our specific weighted-average assumptions for the risk-free interest rate, expected
term, expected volatility and expected dividend yield are documented in Note 16. Additionally, under SFAS No. 123
(revised 2004), “Share-Based Compensation” (“SFAS 123R”) we are required to estimate pre-vesting forfeitures for
purposes of determining compensation expense to be recognized. Future expense amounts for any particular quarterly or
annual period could be affected by changes in our assumptions or changes in market conditions.
We have determined that it is appropriate to group our awards into two homogeneous groups when estimating expected
term and pre-vesting forfeitures. These groups consist of grants made primarily to restaurant-level employees under our
Restaurant General Manager Stock Option Plan (the “RGM Plan”) and grants made to executives under our other stock
award plans. Historically, approximately 15% - 20% of total options and SARs granted have been made under the RGM
Plan.
Grants under the RGM Plan typically cliff vest after four years and grants made to executives under our other stock award
plans typically have a graded vesting schedule and vest 25% per year over four years. We use a single weighted-average
expected term for our awards that have a graded vesting schedule as permitted by SFAS 123R. We revaluate our expected
term assumptions using historical exercise and post-vesting employment termination behavior on a regular basis. Based
on the results of this analysis, we have determined that six years is an appropriate expected term for awards to both
restaurant level employees and to executives.
Upon each stock award grant we revaluate the expected volatility, including consideration of both historical volatility of
our stock as well as implied volatility associated with our traded options. We have estimated forfeitures based on
historical data. Based on such data, we believe that approximately 50% of all awards granted under the RGM Plan will be
forfeited and approximately 20% of all awards granted to above-store executives will be forfeited.
Income Taxes
At December 27, 2008, we had a valuation allowance of $254 million primarily to reduce our net operating loss and tax
credit carryforward benefits of $256 million, as well as our other deferred tax assets, to amounts that will more likely than
not be realized. The net operating loss and tax credit carryforwards exist in federal, state and foreign jurisdictions that
have varying carryforward periods and restrictions on usage, including approximately $150 million in certain foreign
jurisdictions that may be carried forward indefinitely. The estimation of future taxable income in these jurisdictions and
our resulting ability to utilize net operating loss and tax credit carryforwards can significantly change based on future
events, including our determinations as to the feasibility of certain tax planning strategies. Thus, recorded valuation
allowances may be subject to material future changes.
Form 10-K