Pizza Hut 2013 Annual Report Download - page 141

YUM! BRANDS, INC.-2013 Form10-K 45
Form 10-K
PART II
ITEM 8Financial Statements andSupplementaryData
agreements entered into concurrently with a refranchising transaction that
are not consistent with market terms as part of the upfront refranchising
gain (loss) and amortize that amount into Franchise and license fees and
income over the period such terms are in effect. The value of terms that are
not considered to be at market within franchise agreements is estimated
based upon the difference between cash expected to be received under
the franchise agreement and cash that would have been expected to be
received under a franchise agreement with terms substantially consistent
with market.
Direct Marketing Costs. We charge direct marketing costs to expense
ratably in relation to revenues over the year in which incurred and, in
the case of advertising production costs, in the year the advertisement
is first shown. Deferred direct marketing costs, which are classified as
prepaid expenses, consist of media and related advertising production
costs which will generally be used for the first time in the next fiscal year
and have historically not been significant. 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 $607 million, $608 million and $593 million in 2013, 2012 and 2011,
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 $31 million, $30 million and
$34 million in 2013, 2012 and 2011, 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 awards that actually vest. We
present this compensation cost consistent with the other compensation
costs for the employee recipient in either Payroll and employee benefits
or G&A expenses. See Note 15 for further discussion of our share-based
compensation plans.
Legal Costs. Settlement costs are accrued when they are deemed
probable and reasonably 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
reasonably estimable. Legal fees not related to self-insured property
and casualty losses are recognized as incurred. See Note 19 for further
discussion of our legal proceedings.
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 flows 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 flows
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 flows, which are based on our
entity-specific 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 flows of the restaurant, which include
a deduction for royalties we would receive under a franchise agreement
with terms substantially at market� The after-tax cash flows 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 flows�
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 classified 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 flows, 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) significant changes to the plan of sale are not likely; and (f) the
sale is probable within one year. Restaurants classified 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 classified 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 satisfied that the franchisee can meet its financial obligations.
If the criteria for gain recognition are not met, we defer the gain to the
extent we have a remaining financial exposure in connection with the sales
transaction. Deferred gains are recognized when the gain recognition
criteria are met or as our financial 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.