Pizza Hut 2013 Annual Report Download - page 142

YUM! BRANDS, INC.-2013 Form10-K46
Form 10-K
PART II
ITEM 8Financial Statements andSupplementaryData
Considerable management judgment is necessary to estimate future cash
flows, including cash flows from continuing use, terminal value, sublease
income and refranchising proceeds� Accordingly, actual results could vary
significantly from our estimates.
Impairment of Investments in Unconsolidated Affiliates. We record
impairment charges related to an investment in an unconsolidated affiliate
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 affiliates for impairment
when they have experienced two consecutive years of operating losses. We
recorded no impairment associated with our investments in unconsolidated
affiliates during 2013, 2012 and 2011.
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
leases as a condition to the refranchising of certain Company restaurants.
We recognize a liability for the fair value of such lease guarantees upon
refranchising and upon subsequent renewals of such leases when we remain
contingently liable. The related expense and any subsequent changes
in the guarantees are included in Refranchising (gain) loss. The related
expense and subsequent changes in the guarantees for other franchise
support guarantees not associated with a refranchising transaction are
included in Franchise and license expense.
Income Taxes. We record deferred tax assets and liabilities for the future
tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases as well as operating loss, capital loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Additionally,
in determining the need for recording a valuation allowance against the
carrying amount of deferred tax assets, we consider the amount of taxable
income and periods over which it must be earned, actual levels of past
taxable income and known trends and events or transactions that are
expected to affect future levels of taxable income. Where we determine
that it is more likely than not that all or a portion of an asset will not be
realized, we record a valuation allowance.
We recognize the benefit of positions taken or expected to be taken in
our tax returns in our Income tax provision when it is more likely than
not (i.e. a likelihood of more than fifty percent) that the position would be
sustained upon examination by tax authorities. A recognized tax position
is then measured at the largest amount of benefit that is greater than
fifty percent likely of being realized upon settlement. We evaluate these
amounts on a quarterly basis to insure that they have been appropriately
adjusted for audit settlements and other events we believe may impact
the outcome. Changes in judgment that result in subsequent recognition,
derecognition or a change in measurement of a tax position taken in a prior
annual period (including any related interest and penalties) are recognized
as a discrete item in the interim period in which the change occurs. We
recognize accrued interest and penalties related to unrecognized tax
benefits as components of our Income tax provision.
We do not record a U.S. deferred tax liability for the excess of the book
basis over the tax basis of our investments in foreign subsidiaries to the
extent that the basis difference results from earnings that meet the indefinite
reversal criteria. This criteria is met if the foreign subsidiary has invested,
or will invest, the undistributed earnings indefinitely. The decision as to the
amount of undistributed earnings that we intend to maintain in non-U.S.
subsidiaries considers items including, but not limited to, forecasts and
budgets of financial needs of cash for working capital, liquidity plans and
expected cash requirements in the United States.
See Note 17 for a further discussion of our income taxes.
Fair Value Measurements. Fair value is the price we would receive to sell
an asset or pay to transfer a liability (exit price) in an orderly transaction
between market participants. For those assets and liabilities we record
or disclose at fair value, we determine fair value based upon the quoted
market price, if available. If a quoted market price is not available for
identical assets, we determine fair value based upon the quoted market
price of similar assets or the present value of expected future cash flows
considering the risks involved, including counterparty performance risk if
appropriate, and using discount rates appropriate for the duration� The
fair values are assigned a level within the fair value hierarchy, depending
on the source of the inputs into the calculation�
Level 1 Inputs based upon quoted prices in active markets
for identical assets�
Level 2 Inputs other than quoted prices included within
Level 1 that are observable for the asset, either
directly or indirectly�
Level 3 Inputs that are unobservable for the asset�
Cash and Cash Equivalents. Cash equivalents represent funds we have
temporarily invested (with original maturities not exceeding three months),
including short-term, highly liquid debt securities� Cash and overdraft
balances that meet the criteria for right to offset are presented net on our
Consolidated Balance Sheet�
Receivables. The Company’s receivables are primarily generated from
ongoing business relationships with our franchisees and licensees as a result
of franchise, license and lease agreements� Trade receivables consisting of
royalties from franchisees and licensees are generally due within 30 days
of the period in which the corresponding sales occur and are classified
as Accounts and notes receivable on our Consolidated Balance Sheets.
Our provision for uncollectible franchise and licensee receivable balances
is based upon pre-defined aging criteria or upon the occurrence of other
events that indicate that we may not collect the balance due. Additionally,
we monitor the financial condition of our franchisees and licensees and
record provisions for estimated losses on receivables when we believe
it probable that our franchisees or licensees will be unable to make their
required payments. While we use the best information available in making
our determination, the ultimate recovery of recorded receivables is also
dependent upon future economic events and other conditions that may be
beyond our control. We recorded $2 million in net provisions, $1 million in
net recoveries and $7 million in net provisions within Franchise and license
expenses in 2013, 2012 and 2011, respectively, related to uncollectible
franchise and license trade receivables. Trade receivables that are ultimately
deemed to be uncollectible, and for which collection efforts have been
exhausted, are written off against the allowance for doubtful accounts.
2013 2012
Accounts and notes receivable $ 330 $ 313
Allowance for doubtful accounts (11) (12)
Accounts and notes receivable, net $ 319 $ 301
Our financing receivables primarily consist of notes receivables and direct
financing leases with franchisees which we enter into from time to time.
As these receivables primarily relate to our ongoing business agreements
with franchisees and licensees, we consider such receivables to have
similar risk characteristics and evaluate them as one collective portfolio
segment and class for determining the allowance for doubtful accounts.
We monitor the financial condition of our franchisees and licensees
and record provisions for estimated losses on receivables when we
believe it is probable that our franchisees or licensees will be unable to
make their required payments. Balances of notes receivable and direct
financing leases due within one year are included in Accounts and notes
receivable while amounts due beyond one year are included in Other
assets. Amounts included in Other assets totaled $22 million (net of an
allowance of $1million) and $18 million (net of an allowance of $3 million)
at December 28, 2013 and December29,2012, respectively. Financing
receivables that are ultimately deemed to be uncollectible, and for which
collection efforts have been exhausted, are written off against the allowance
for doubtful accounts. Interest income recorded on financing receivables
has traditionally been insignificant.