Pizza Hut 2012 Annual Report Download - page 137

YUM! BRANDS, INC.-2012 Form10-K 45
Form 10-K
PART II
ITEM 8Financial Statements andSupplementaryData
costs which will generally be used for the fi rst time in the next fi scal year
and have historically not been signifi cant.To the extent we participate in
advertising cooperatives, we expense our contributions as incurred which
are generally based on a percentage of sales.Our advertising expenses
were $608million, $593million and $557million in 2012, 2011 and 2010,
respectively.We report substantially all of our direct marketing costs in
Occupancy and other operating expenses.
Research and Development Expenses.Research and development
expenses, which we expense as incurred, are reported in G&A
expenses.Research and development expenses were $30million, $34million
and $33million in 2012, 2011 and 2010, respectively.
Share-Based Employee Compensation.We recognize all share-based
payments to employees, including grants of employee stock options
and stock appreciation rights (“SARs”), in the Consolidated Financial
Statements as compensation cost over the service period based on their
fair value on the date of grant.This compensation cost is recognized over
the service period on a straight-line basis for the fair value of awards that
actually vest.We present this compensation cost consistent with the
other compensation costs for the employee recipient in either Payroll and
employee benefi ts or G&A expenses.
Legal Costs. Settlement costs are accrued when they are deemed
probable and estimable. Anticipated legal fees related to self-insured
workers’ compensation, employment practices liability, general liability,
automobile liability, product liability and property losses (collectively,
“property and casualty losses”) are accrued when deemed probable and
estimable. Legal fees not related to self-insured property and casualty
losses are recognized as incurred.
Impairment or Disposal of Property, Plant and Equipment.Property,
plant and equipment (“PP&E”) is tested for impairment whenever events
or changes in circumstances indicate that the carrying value of the assets
may not be recoverable.The assets are not recoverable if their carrying
value is less than the undiscounted cash fl ows we expect to generate from
such assets.If the assets are not deemed to be recoverable, impairment is
measured based on the excess of their carrying value over their fair value.
For purposes of impairment testing for our restaurants, we have concluded
that an individual restaurant is the lowest level of independent cash fl ows
unless our intent is to refranchise restaurants as a group.We review our
long-lived assets of such individual restaurants (primarily PP&E and allocated
intangible assets subject to amortization) semi-annually for impairment, or
whenever events or changes in circumstances indicate that the carrying
amount of a restaurant may not be recoverable.We use two consecutive
years of operating losses as our primary indicator of potential impairment
for our semi-annual impairment testing of these restaurant assets.We
evaluate the recoverability of these restaurant assets by comparing the
estimated undiscounted future cash fl ows, which are based on our entity-
specifi c assumptions, to the carrying value of such assets.For restaurant
assets that are not deemed to be recoverable, we write-down an impaired
restaurant to its estimated fair value, which becomes its new cost basis.Fair
value is an estimate of the price a franchisee would pay for the restaurant
and its related assets and is determined by discounting the estimated
future after-tax cash fl ows of the restaurant, which include a deduction
we would receive under a franchise agreement with terms substantially
at market.The after-tax cash fl ows incorporate reasonable assumptions
we believe a franchisee would make such as sales growth and margin
improvement.The discount rate used in the fair value calculation is our
estimate of the required rate of return that a franchisee would expect to
receive when purchasing a similar restaurant 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 fl ows.
In executing our refranchising initiatives, we most often offer groups of
restaurants for sale.When we believe a restaurant or groups of restaurants
will be refranchised for a price less than their carrying value, but do not
believe the restaurant(s) have met the criteria to be classifi ed as held for sale,
we review the restaurants for impairment.We evaluate the recoverability
of these restaurant assets at the date it is considered more likely than not
that they will be refranchised by comparing estimated sales proceeds plus
holding period cash fl ows, if any, to the carrying value of the restaurant
or group of restaurants.For restaurant assets that are not deemed to be
recoverable, we recognize impairment for any excess of carrying value
over the fair value of the restaurants, which is based on the expected net
sales proceeds.To the extent ongoing agreements to be entered into with
the franchisee simultaneous with the refranchising are expected to contain
terms, such as royalty rates, not at prevailing market rates, we consider
the off-market terms in our impairment evaluation.We recognize any such
impairment charges in Refranchising (gain) loss.We classify restaurants
as held for sale and suspend depreciation and amortization when (a) we
make a decision to refranchise; (b) the restaurants can be immediately
removed from operations; (c) we have begun an active program to locate a
buyer; (d) the restaurant is being actively marketed at a reasonable market
price; (e) signifi cant changes to the plan of sale are not likely; and (f) the
sale is probable within one year.Restaurants classifi ed as held for sale
are recorded at the lower of their carrying value or fair value less cost to
sell.We recognize estimated losses on restaurants that are classifi ed as
held for sale in Refranchising (gain) loss.
Refranchising (gain) loss includes the gains or losses from the sales of
our restaurants to new and existing franchisees, including impairment
charges discussed above, and the related initial franchise fees. We
recognize gains on restaurant refranchisings when the sale transaction
closes, the franchisee has a minimum amount of the purchase price in
at-risk equity, and we are satisfi ed that the franchisee can meet its fi nancial
obligations.If the criteria for gain recognition are not met, we defer the
gain to the extent we have a remaining fi nancial exposure in connection
with the sales transaction.Deferred gains are recognized when the gain
recognition criteria are met or as our fi nancial exposure is reduced.When
we make a decision to retain a store, or group of stores, previously held
for sale, we revalue the store at the lower of its (a) net book value at our
original sale decision date less normal depreciation and amortization that
would have been recorded during the period held for sale or (b) its current
fair value.This value becomes the store’s new cost basis.We record any
resulting difference between the store’s carrying amount and its new cost
basis to Closure and impairment (income) expense.
When we decide to close a restaurant, it is reviewed for impairment and
depreciable lives are adjusted based on the expected disposal date.Other
costs incurred when closing a restaurant such as costs of disposing of the
assets as well as other facility-related expenses from previously closed
stores are generally expensed as incurred.Additionally, at the date we
cease using a property under an operating lease, we record a liability for
the net present value of any remaining lease obligations, net of estimated
sublease income, if any.Any costs recorded upon store closure as well as
any subsequent adjustments to liabilities for remaining lease obligations as
a result of lease termination or changes in estimates of sublease income
are recorded in Closures and impairment (income) expenses.To the
extent we sell assets, primarily land, associated with a closed store, any
gain or loss upon that sale is also recorded in Closures and impairment
(income) expenses.
Considerable management judgment is necessary to estimate future cash
fl ows, including cash fl ows from continuing use, terminal value, sublease
income and refranchising proceeds.Accordingly, actual results could vary
signifi cantly from our estimates.
Impairment of Investments in Unconsolidated Affi liates.We record
impairment charges related to an investment in an unconsolidated affi liate
whenever events or circumstances indicate that a decrease in the fair value
of an investment has occurred which is other than temporary.In addition,
we evaluate our investments in unconsolidated affi liates for impairment
when they have experienced two consecutive years of operating losses.We
recorded no impairment associated with our investments in unconsolidated
affi liates during 2012, 2011 and 2010.
Guarantees.We recognize, at inception of a guarantee, a liability for the fair
value of certain obligations undertaken.The majority of our guarantees are
issued as a result of assigning our interest in obligations under operating