Pizza Hut 2011 Annual Report Download - page 164

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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.
If we record goodwill upon acquisition of a restaurant(s) from a franchisee and such restaurant(s) is then sold within two years of
acquisition, the goodwill associated with the acquired restaurant(s) is written off in its entirety. If the restaurant is refranchised
two years or more subsequent to its acquisition, we include goodwill in the carrying amount of the restaurants disposed of based
on the relative fair values of the portion of the reporting unit disposed of in the refranchising and the portion of the reporting unit
that will be retained. The fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference
to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which
includes a deduction for the anticipated, future royalties the franchisee will pay us associated with the franchise agreement entered
into simultaneously with the refranchising transition. Appropriate adjustments are made if such franchise agreement includes
terms that are determined to not be at prevailing market rates. The fair value of the reporting unit retained is based on the price
a willing buyer would pay for the reporting unit and includes the value of franchise agreements. As such, the fair value of the
reporting unit retained can include expected cash flows from future royalties from those restaurants currently being refranchised,
future royalties from existing franchise businesses and company restaurant operations. As a result, the percentage of a reporting
unit’s goodwill that will be written off in a refranchising transaction will be less than the percentage of the reporting unit’s company
restaurants that are refranchised in that transaction and goodwill can be allocated to a reporting unit with only franchise restaurants.
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. Intangible assets that are deemed to have a definite life are amortized on a straight-line basis to their residual value.
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 not recoverable 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. We use derivative instruments primarily to hedge interest rate and foreign currency
risks. 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 12 for a discussion of our use of derivative instruments,
management of credit risk inherent in derivative instruments and fair value information.
Common Stock Share Repurchases. From time to time, we repurchase shares of our Common Stock under share repurchase
programs authorized by our Board of Directors. Shares repurchased constitute authorized, but unissued shares under the North
Carolina laws under which we are incorporated. Additionally, our Common Stock has no par or stated value. Accordingly, we
Form 10-K