Pizza Hut 2010 Annual Report Download - page 151

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In July 2010, the FASB issued accounting guidance that requires new disclosures about an entity’s allowance for credit
losses and the credit quality of its financing receivables. Existing disclosures are amended to require an entity to provide
certain disclosures on a disaggregated basis by portfolio segment or by class of financing receivables. The new
disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after
December 15, 2010 and have been complied with in this Form 10-K. The disclosures about activity that occurs during a
reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.
Critical Accounting Policies and Estimates
Our reported results are impacted by the application of certain accounting policies that require us to make subjective or
complex judgments. These judgments involve estimations of the effect of matters that are inherently uncertain and may
significantly impact our quarterly or annual results of operations or financial condition. Changes in the estimates and
judgments could significantly affect our results of operations, financial condition and cash flows in future years. A
description of what we consider to be our most significant critical accounting policies follows.
Impairment or Disposal of Long-Lived Assets
We review our long-lived assets of restaurants (primarily PP&E and allocated intangible assets subject to amortization)
that are currently operating semi-annually for impairment, or whenever events or changes in circumstances indicate that
the carrying amount of a restaurant may not be recoverable. We evaluate recoverability based on the restaurant’s
forecasted undiscounted cash flows, which incorporate our best estimate of sales growth and margin improvement based
upon our plans for the unit and actual results at comparable restaurants. For restaurant assets that are not deemed to be
recoverable, we write down an impaired restaurant to its estimated fair market value. Key assumptions in the
determination of fair value are the future after-tax cash flows of the restaurant and discount rate. The after-tax cash flows
incorporate reasonable sales growth and margin improvement assumptions that would be used by a franchisee in the
determination of a purchase price for the restaurant. Estimates of future cash flows are highly subjective judgments and
can be significantly impacted by changes in the business or economic conditions.
We perform an impairment evaluation at a restaurant group level if there is an expectation that we will refranchise
restaurants as a group. Expected net sales proceeds are generally based on actual bids from the buyer, if available, or
anticipated bids given the discounted projected after-tax cash flows for the group of restaurants. The after-tax cash flows
used in determining the anticipated bids incorporate reasonable assumptions we believe a franchisee would make such as
sales growth and margin improvement as well as expectations as to the useful lives of the restaurant assets. Historically,
these anticipated bids have been reasonably accurate estimations of the proceeds ultimately received.
The discount rate used in the fair value calculations is our estimate of the required rate of return that a franchisee would
expect to receive when purchasing a similar restaurant or groups of restaurants and the related long-lived assets. The
discount rate incorporates rates of returns for historical refranchising market transactions and is commensurate with the
risks and uncertainty inherent in the forecasted cash flows.
We have certain definite-lived intangible assets that are not attributable to a specific restaurant, such as the LJS and A&W
trademark/brand intangible assets and franchise contract rights, which are amortized over their expected useful lives. We
base the expected useful lives of our trademark/brand intangible assets on a number of factors including the competitive
environment, our future development plans for the applicable Concept and the level of franchisee commitment to the
Concept. We generally base the expected useful lives of our franchise contract rights on their respective contractual terms
including renewals when appropriate.
These definite-lived intangible assets 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 is
written down to its estimated fair value, which is based on discounted 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.
See Note 2 for a further discussion of our policy regarding the impairment or disposal of property, plant and equipment.
Form 10-K