Pizza Hut 2008 Annual Report Download - page 185

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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 (income) 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 suspend 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 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 resulting difference between the store’s carrying
amount and its new cost basis to Refranchising (gain) loss.
Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use,
terminal value, sublease income and refranchising proceeds. 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 27, 2008, December 29,
2007 and December 30, 2006.
Guarantees. We account for certain guarantees in accordance with Financial Accounting Standards Board (“FASB”)
Interpretation (“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 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.
Form 10-K