Pizza Hut 2009 Annual Report Download - page 163

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We do not amortize goodwill and indefinite-lived intangible assets. We evaluate the remaining useful life of an intangible
asset that is not being amortized each reporting period to determine whether events and circumstances continue to support
an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite
useful life, we amortize the intangible asset prospectively over its estimated remaining useful life. Amortizable intangible
assets are amortized on a straight-line basis to their residual value.
Goodwill has been assigned to reporting units for purposes of impairment testing. Our reporting units are our operating
segments in the U.S. (see Note 20) and our business units internationally (typically individual countries). We evaluate
goodwill and indefinite lived assets for impairment on an annual basis or more often if an event occurs or circumstances
change that indicate impairments might exist. Goodwill impairment tests consist of a comparison of each reporting unit’s
fair value with its carrying value. Fair value is the price a willing buyer would pay for a reporting unit, and is generally
estimated using discounted expected future after-tax cash flows from Company operations and franchise royalties. 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. If the carrying value of a reporting unit exceeds its fair value,
goodwill is written down to its implied fair value. We have selected the beginning of our fourth quarter as the date on
which to perform our ongoing annual impairment test for goodwill.
For indefinite-lived intangible assets, our impairment test consists of a comparison of the fair value of an intangible asset
with its carrying amount. Fair value is an estimate of the price a willing buyer would pay for the intangible asset and is
generally estimated by discounting the expected future after-tax cash flows associated with the intangible asset. We also
perform our annual test for impairment of our indefinite-lived intangible assets at the beginning of our fourth quarter.
Our definite-lived intangible assets that are not allocated to an individual restaurant are evaluated for impairment
whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be
recoverable. An intangible asset that is deemed impaired on a undiscounted basis is written down to its estimated fair
value, which is our estimate of the price a willing buyer would pay for the intangible asset based on discounted expected
future after-tax cash flows. For purposes of our impairment analysis, we update the cash flows that were initially used to
value the definite-lived intangible asset to reflect our current estimates and assumptions over the asset’s future remaining
life.
Derivative Financial Instruments. Historically, our use of derivative instruments has primarily been to hedge interest
rates and foreign currency denominated assets and liabilities. These derivative contracts are entered into with financial
institutions. We do not use derivative instruments for trading purposes and we have procedures in place to monitor and
control their use.
We record all derivative instruments on our Consolidated Balance Sheet at fair value. For derivative instruments that are
designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or
loss on the hedged item attributable to the hedged risk are recognized in the results of operations. For derivative
instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same
period or periods during which the hedged transaction affects earnings. For derivative instruments that are designated and
qualify as a net investment hedge, the effective portion of the gain or loss on the derivative instrument is reported in the
foreign currency translation component of other comprehensive income (loss). Any ineffective portion of the gain or loss
on the derivative instrument for a cash flow hedge or net investment hedge is recorded in the results of operations
immediately. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the
results of operations immediately. See Note 13 for a discussion of our use of derivative instruments, management of
credit risk inherent in derivative instruments and fair value information.
Form 10-K