Pizza Hut 2013 Annual Report Download - page 139

YUM! BRANDS, INC.-2013 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”) comprise primarily the worldwide operations
of its KFC, Pizza Hut and Taco Bell (collectively the “Concepts”). YUM
has over 40,000 units of which 55% 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 first 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, convenient, 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 efficient. We also operate multibrand units, where two or more of our
Concepts are operated in a single unit.
As of and through December 28, 2013, YUM consisted 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 financial 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.
In the first quarter of 2014, we will combine our YRI and U.S. businesses
and begin reporting segment information for three global divisions: KFC,
Pizza Hut and Taco Bell. China and India will remain separate reporting
segments due to their strategic importance and growth potential. This
new structure is designed to drive greater global brand focus, enabling
us to more effectively share know-how and accelerate growth. While our
consolidated results will not be impacted, we will restate our historical
segment information during 2014 for consistent presentation.
NOTE2 Summary of Significant 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 financial 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 financial 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 financial 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 beneficiary. The primary beneficiary is the entity that possesses
the power to direct the activities of the VIE that most significantly impact
its economic performance and has the obligation to absorb losses or the
right to receive benefits from the VIE that are significant to it.
Our most significant 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 significant financial 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 2013, YUM has future lease
payments due from franchisees, on a nominal basis, of approximately
$400 million. As our franchise and license arrangements provide our
franchisee and licensee entities the power to direct the activities that
most significantly impact their economic performance, we do not consider
ourselves the primary beneficiary 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 beneficiary 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 affiliates. Thus, we do not
consolidate these affiliates, instead accounting for them under the equity
method. Our share of the net income or loss of those unconsolidated affiliates
is included in Other (income) expense. On February 1, 2012, we acquired
an additional 66% interest in Little Sheep Group Limited (“Little Sheep”),
increasing our ownership to 93%. 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. A meat processing entity affiliated
with our Little Sheep business is accounted for by the equity method.
We report Net income attributable to non-controlling interests, which
includes the minority shareholders of the entities that operate the KFCs
in Beijing and Shanghai, China and the minority shareholders of Little