Pizza Hut 2012 Annual Report Download - page 135

YUM! BRANDS, INC.-2012 Form10-K 43
Form 10-K
PART II
ITEM 8Financial Statements andSupplementaryData
Notes to Consolidated Financial Statements
(Tabular amounts in millions, except share data)
NOTE1 Description of Business
YUM! Brands, Inc. and Subsidiaries (collectively referred to herein as
“YUM” or the “Company”) comprises primarily the worldwide operations
of KFC, Pizza Hut and Taco Bell (collectively the “Concepts”).YUM is the
world’s largest quick service restaurant company based on the number
of system units, with over 39,000 units of which approximately 54% are
located outside the U.S. in more than 125 countries and territories.YUM
was created as an independent, publicly-owned company on October6,
1997 via a tax-free distribution by our former parent, PepsiCo, Inc., of
our Common Stock to its shareholders.References to YUM throughout
these Consolidated Financial Statements are made using the fi rst person
notations of “we,” “us” or “our.”
Through our widely-recognized Concepts, we develop, operate, franchise
and license a system of both traditional and non-traditional quick service
restaurants.Each Concept has proprietary menu items and emphasizes the
preparation of food with high quality ingredients as well as unique recipes
and special seasonings to provide appealing, tasty and attractive food
at competitive prices.Our traditional restaurants feature dine-in, carryout
and, in some instances, drive-thru or delivery service.Non-traditional
units, which are principally licensed outlets, include express units and
kiosks which have a more limited menu and operate in non-traditional
locations like malls, airports, gasoline service stations, train stations,
subways, convenience stores, stadiums, amusement parks and colleges,
where a full-scale traditional outlet would not be practical or effi cient.We
also operate multibrand units, where two or more of our Concepts are
operated in a single unit.
YUM consists of six operating segments: YUM Restaurants China (“China”
or “China Division”), YUM Restaurants International (“YRI” or “International
Division”), KFC U.S., Pizza Hut U.S., Taco Bell U.S., and YUM Restaurants
India (“India” or “India Division”).The China Division includes mainland
China, and the India Division includes India, Bangladesh, Mauritius, Nepal
and Sri Lanka. YRI includes the remainder of our international operations.
For fi nancial reporting purposes, management considers the three U.S.
operating segments to be similar and, therefore, has aggregated them
into a single reportable operating segment (“U.S.”).As a result of changes
to our management reporting structure, in 2012 we began reporting
information for our India business as a standalone reporting segment
separated from YRI. While our consolidated results are not impacted, our
historical segment information has been restated to be consistent with the
current period presentation. In December2011 we sold our Long John
Silver’s (“LJS”) and A&W All American Food Restaurants (“A&W”) brands
to key franchise leaders and strategic investors in separate transactions.
The results for these businesses through the sale date are included in the
Company’s results for 2011 and 2010.
NOTE2 Summary of Signifi cant Accounting Policies
Our preparation of the accompanying Consolidated Financial Statements
in conformity with Generally Accepted Accounting Principles in the
United States of America (“GAAP”) requires us to make estimates and
assumptions that affect reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the fi nancial statements,
and the reported amounts of revenues and expenses during the reporting
period.Actual results could differ from these estimates.
Principles of Consolidation and Basis of Preparation.Intercompany
accounts and transactions have been eliminated in consolidation.We
consolidate entities in which we have a controlling fi nancial interest, the
usual condition of which is ownership of a majority voting interest.We also
consider for consolidation an entity, in which we have certain interests, where
the controlling fi nancial interest may be achieved through arrangements that
do not involve voting interests.Such an entity, known as a variable interest
entity (“VIE”), is required to be consolidated by its primary benefi ciary.The
primary benefi ciary isthe entity that possesses the power to direct the
activities of the VIE that most signifi cantly impact its economic performance
and has the obligation to absorb losses or the right to receive benefi ts
from the VIE that are signifi cant to it.
Our most signifi cant variable interests are in entities that operate restaurants
under our Concepts’ franchise and license arrangements.We do not generally
have an equity interest in our franchisee or licensee businesses with the
exception of certain entities in China as discussed below.Additionally,
we do not typically provide signifi cant fi nancial support such as loans or
guarantees to our franchisees and licensees.However, we do have variable
interests in certain franchisees through real estate lease arrangements with
them to which we are a party.At the end of 2012, YUM has future lease
payments due from franchisees, on a nominal basis, of approximately
$430million.As our franchise and license arrangements provide our
franchisee and licensee entities the power to direct the activities that
most signifi cantly impact their economic performance, we do not consider
ourselves the primary benefi ciary of any such entity that might otherwise
be considered a VIE.
See Note19 for additional information on an entity that operates a franchise
lending program that is a VIE in which we have a variable interest but for
which we are not the primary benefi ciary and thus do not consolidate.
Certain investments in entities that operate KFCs in China are accounted for
by the equity method.These entities are not VIEs and our lack of majority
voting rights precludes us from controlling these affi liates.Thus, we do not
consolidate these affi liates, instead accounting for them under the equity
method.Our share of the net income or loss of those unconsolidated
affi liates is included in Other (income) expense.On February1, 2012,
we acquired an additional 66% interest in Little Sheep Group Limited
(“Little Sheep”). As a result, we began consolidating this business, which
was previously accounted for using the equity method. See Note4 for
a further description of the accounting upon acquisition of additional
interest in Little Sheep.
We report Net income attributable to non-controlling interests, which
include the minority shareholders of the entities that operate the KFCs in
Beijing and Shanghai, China and the minority shareholders of Little Sheep,
separately on the face of our Consolidated Statements of Income.The
portion of equity not attributable to the Company is reported within equity,
separately from the Company’s equity on the Consolidated Balance Sheets.
The shareholder that owns the remaining 7% ownership interest in Little
Sheep holds an option that, if exercised, requires us to redeem their
non-controlling interest. Redemption may occur any time after the third
anniversary of the acquisition. This Redeemable non-controlling interest