Pizza Hut 2011 Annual Report Download - page 168

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Pizza Hut UK reporting unit exceeded its carrying value and as such there was no impairment of the approximately $100
million in goodwill attributable to the reporting unit.
(b) In the year ended December 25, 2010 we recorded a $52 million loss on the refranchising of our Mexico equity market
as we sold all of our Company-owned restaurants, comprised of 222 KFCs and 123 Pizza Huts, to an existing Latin
American franchise partner. The buyer is serving as the master franchisee for Mexico which had 102 KFC and 53 Pizza
Hut franchise restaurants at the time of the transaction. The write-off of goodwill included in this loss was minimal as
our Mexico reporting unit included an insignificant amount of goodwill. This loss did not result in any related income
tax benefit.
(c) During the year ended December 26, 2009 we recognized a non-cash $10 million refranchising loss as a result of our
decision to offer to refranchise our KFC Taiwan equity market. During the year ended December 25, 2010 we refranchised
all of our remaining company restaurants in Taiwan, which consisted of 124 KFCs. We included in our December 25,
2010 financial statements a non-cash write-off of $7 million of goodwill in determining the loss on refranchising of
Taiwan. Neither of these losses resulted in a related income tax benefit. The amount of goodwill write-off was based on
the relative fair values of the Taiwan business disposed of and the portion of the business that was retained. The fair
value of the business disposed of was determined by reference to the discounted value of the future cash flows expected
to be generated by the restaurants and retained by the franchisee, which include a deduction for the anticipated royalties
the franchisee will pay the Company associated with the franchise agreement entered into in connection with this
refranchising transaction. The fair value of the Taiwan business retained consists of expected, net cash flows to be derived
from royalties from franchisees, including the royalties associated with the franchise agreement entered into in connection
with this refranchising transaction. We believe the terms of the franchise agreement entered into in connection with the
Taiwan refranchising are substantially consistent with market. The remaining carrying value of goodwill related to our
Taiwan business of $30 million, after the aforementioned write-off, was determined not to be impaired as the fair value
of the Taiwan reporting unit exceeded its carrying amount.
(d) U.S. refranchising losses in the years ended December 31, 2011 and December 25, 2010 are primarily due to losses on
sales of and offers to refranchise KFCs in the U.S. There were approximately 250 and 600 KFC restaurants offered for
refranchising as of December 31, 2011 and December 25, 2010, respectively. While we did not yet believe these KFCs
met the criteria to be classified as held for sale, we did, consistent with our historical practice, review the restaurants for
impairment as a result of our offer to refranchise. We recorded impairment charges where we determined that the carrying
value of restaurant groups to be sold was not recoverable based upon our estimate of expected refranchising proceeds
and holding period cash flows anticipated while we continue to operate the restaurants as company units. For those
restaurant groups deemed impaired, we wrote such restaurant groups down to our estimate of their fair values, which
were based on the sales price we would expect to receive from a franchisee for each restaurant group. This fair value
determination considered current market conditions, real-estate values, trends in the KFC U.S. business, prices for similar
transactions in the restaurant industry and preliminary offers for the restaurant groups to date. The non-cash impairment
charges that were recorded related to our offers to refranchise these company-operated KFC restaurants in the U.S.
decreased depreciation expense versus what would have otherwise been recorded by $10 million and $9 million in the
years ended December 31, 2011 and December 25, 2010, respectively. These depreciation reductions were not allocated
to the U.S. segment resulting in depreciation expense in the U.S. segment results continuing to be recorded at the rate at
which it was prior to the impairment charges being recorded for these restaurants. We will continue to review the restaurant
groups for any further necessary impairment until the date they are sold. The aforementioned non-cash impairment
charges do not include any allocation of the KFC reporting unit goodwill in the restaurant group carrying value. This
additional non-cash write-down would be recorded, consistent with our historical policy, if the restaurant groups, or any
subset of the restaurant groups, ultimately meet the criteria to be classified as held for sale. We will also be required to
record a charge for the fair value of our guarantee of future lease payments for leases we assign to the franchisee upon
any sale.
Store Closure and Impairment Activity
Store closure (income) costs and Store impairment charges by reportable segment are presented below. These tables exclude $80
million of net losses recorded in 2011 related to the LJS and A&W divestitures and a $26 million goodwill impairment charge
recorded in 2009 related to the LJS and A&W businesses we previously owned. Neither of these amounts were allocated to
segments for performance reporting purposes:
Form 10-K