Pizza Hut 2009 Annual Report Download - page 146

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Allowances for Franchise and License Receivables/Guarantees
Franchise and license receivable balances include royalties, initial fees as well as other ancillary receivables such as rent
and fees for support services. Our reserve for franchisee or licensee receivable balances is based upon pre-defined aging
criteria or upon the occurrence of other events that indicate that we may not collect the balance due. This methodology
results in an immaterial amount of unreserved past due receivable balances at December 26, 2009. As such, we believe
our allowance for franchise and license receivables is adequate to cover potential exposure from uncollectible receivable
balances at December 26, 2009.
We have historically issued certain guarantees on behalf of franchisees primarily as a result of 1) assigning our interest in
obligations under operating leases, primarily as a condition to the refranchising of certain Company restaurants, 2)
facilitating franchisee development and 3) equipment financing arrangements to facilitate the launch of new sales layers
by franchisees. We recognize a liability for the fair value of such guarantees upon inception of the guarantee and upon
any subsequent modification, such as renewals, 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.
The potential total exposure for lease assignments is significant when aggregated, with approximately $425 million
representing the present value, discounted at our pre-tax cost of debt, of the minimum payments of the assigned leases at
December 26, 2009. Current franchisees are the primary lessees under the vast majority of these leases. Additionally, we
have guaranteed approximately $40 million of franchisee loans of various equipment programs. 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 assigned leases and certain of the equipment loan programs. We believe these cross-default provisions
significantly reduce the risk that we will be required to make payments under these guarantees and, historically, we have
not been required to make significant payments for guarantees. If payment on these guarantees becomes probable and
estimable, we record a liability for our exposure under these guarantees. At December 26, 2009, we have recorded an
immaterial liability for our exposure under these guarantees which we consider to be probable and estimable. If we begin
to be required to perform under these guarantees to a greater extent, our results of operations could be negatively
impacted.
See Note 2 for a further discussion of our policies regarding franchise and license operations.
See Note 21 for a further discussion of our guarantees.
Self-Insured Property and Casualty Losses
We record our best estimate of the remaining cost to settle incurred self-insured property and casualty losses. The
estimate is based on the results of an independent actuarial study and considers historical claim frequency and severity as
well as changes in factors such as our business environment, benefit levels, medical costs and the regulatory environment
that could impact overall self-insurance costs. Additionally, a risk margin to cover unforeseen events that may occur over
the several years it takes for claims to settle is included in our reserve, increasing our confidence level that the recorded
reserve is adequate.
See Note 21 for a further discussion of our insurance programs.
Form 10-K