Pizza Hut 2013 Annual Report Download - page 143

YUM! BRANDS, INC.-2013 Form10-K 47
Form 10-K
PART II
ITEM 8Financial Statements andSupplementaryData
Inventories. We value our inventories at the lower of cost (computed on
the first-in, first-out method) or market.
Property, Plant and Equipment. We state PP&E at cost less accumulated
depreciation and amortization. We calculate depreciation and amortization
on a straight-line basis over the estimated useful lives of the assets as
follows: 5 to 25 years for buildings and improvements, 3 to 20 years for
machinery and equipment and 3 to 7 years for capitalized software costs.
As discussed above, we suspend depreciation and amortization on assets
related to restaurants that are held for sale.
Leases and Leasehold Improvements. The Company leases land, buildings
or both for nearly 7,300 of its restaurants worldwide. The length of our
lease terms, which vary by country and often include renewal options, are
an important factor in determining the appropriate accounting for leases
including the initial classification of the lease as capital or operating and
the timing of recognition of rent expense over the duration of the lease.
We include renewal option periods in determining the term of our leases
when failure to renew the lease would impose a penalty on the Company
in such an amount that a renewal appears to be reasonably assured at
the inception of the lease. The primary penalty to which we are subject
is the economic detriment associated with the existence of leasehold
improvements which might be impaired if we choose not to continue the use
of the leased property. Leasehold improvements, which are a component
of buildings and improvements described above, are amortized over the
shorter of their estimated useful lives or the lease term. We generally do
not receive leasehold improvement incentives upon opening a store that
is subject to a lease.
We expense rent associated with leased land or buildings while a restaurant
is being constructed whether rent is paid or we are subject to a rent
holiday. Additionally, certain of the Company’s operating leases contain
predetermined fixed escalations of the minimum rent during the lease
term. For leases with fixed escalating payments and/or rent holidays, we
record rent expense on a straight-line basis over the lease term, including
any option periods considered in the determination of that lease term.
Contingent rentals are generally based on sales levels in excess of stipulated
amounts, and thus are not considered minimum lease payments and are
included in rent expense when attainment of the contingency is considered
probable (e.g. when Company sales occur).
Internal Development Costs and Abandoned Site Costs. We capitalize
direct costs associated with the site acquisition and construction of a
Company unit on that site, including direct internal payroll and payroll-
related costs. Only those site-specific costs incurred subsequent to the
time that the site acquisition is considered probable are capitalized. If we
subsequently make a determination that it is probable a site for which
internal development costs have been capitalized will not be acquired
or developed, any previously capitalized internal development costs are
expensed and included in G&A expenses.
Goodwill and Intangible Assets. From time to time, the Company
acquires restaurants from one of our Concept’s franchisees or acquires
another business. Goodwill from these acquisitions represents the excess
of the cost of a business acquired over the net of the amounts assigned
to assets acquired, including identifiable intangible assets and liabilities
assumed. Goodwill is not amortized and has been assigned to reporting
units for purposes of impairment testing. Our reporting units are our
operating segments in the U.S. (see Note 18), our YRI business units
(which are aligned based on geography) and individual brands in our
India and China Divisions. Goodwill is assigned to reporting units that are
expected to benefit from the synergies of the combination even though
other assets or liabilities acquired may not be assigned to that reporting
unit. The amount of goodwill assigned to a reporting unit that has not
been assigned any of the other assets acquired or liabilities assumed
is determined by comparing the fair value of the reporting unit before
the acquisition to the fair value of the reporting unit after the acquisition.
We evaluate goodwill for impairment on an annual basis or more often if
an event occurs or circumstances change that indicate impairment might
exist. We have selected the beginning of our fourth quarter as the date
on which to perform our ongoing annual impairment test for goodwill.
We may elect to perform a qualitative assessment for our reporting units
to determine whether it is more likely than not that the fair value of the
reporting unit is greater than its carrying value. If a qualitative assessment
is not performed, or if as a result of a qualitative assessment it is not more
likely than not that the fair value of a reporting unit exceeds its carrying
value, then the reporting unit’s fair value is compared to its carrying value.
Fair value is the price a willing buyer would pay for a reporting unit, and is
generally estimated using discounted expected future after-tax cash flows
from Company-owned restaurant operations and franchise royalties� The
discount rate is our estimate of the required rate of return that a third-party
buyer would expect to receive when purchasing a business from us that
constitutes a reporting unit� We believe the discount rate is commensurate
with the risks and uncertainty inherent in the forecasted cash flows� If the
carrying value of a reporting unit exceeds its fair value, goodwill is written
down to its implied fair value�
If we record goodwill upon acquisition of a restaurant(s) from a franchisee and
such restaurant(s) is then sold within two years of acquisition, the goodwill
associated with the acquired restaurant(s) is written off in its entirety� If the
restaurant is refranchised two years or more subsequent to its acquisition,
we include goodwill in the carrying amount of the restaurants disposed
of based on the relative fair values of the portion of the reporting unit
disposed of in the refranchising and the portion of the reporting unit that
will be retained� The fair value of the portion of the reporting unit disposed
of in a refranchising is determined by reference to the discounted value
of the future cash flows expected to be generated by the restaurant and
retained by the franchisee, which includes a deduction for the anticipated,
future royalties the franchisee will pay us associated with the franchise
agreement entered into simultaneously with the refranchising transition�
The fair value of the reporting unit retained is based on the price a willing
buyer would pay for the reporting unit and includes the value of franchise
agreements� Appropriate adjustments are made if a franchise agreement
includes terms that are determined to not be at prevailing market rates�
As such, the fair value of the reporting unit retained can include expected
cash flows from future royalties from those restaurants currently being
refranchised, future royalties from existing franchise businesses and company
restaurant operations� As a result, the percentage of a reporting unit’s
goodwill that will be written off in a refranchising transaction will be less
than the percentage of the reporting unit’s Company-owned restaurants
that are refranchised in that transaction and goodwill can be allocated to
a reporting unit with only franchise restaurants�
We evaluate the remaining useful life of an intangible asset that is not
being amortized each reporting period to determine whether events and
circumstances continue to support an indefinite useful life. If an intangible
asset that is not being amortized is subsequently determined to have a finite
useful life, we amortize the intangible asset prospectively over its estimated
remaining useful life. Intangible assets that are deemed to have a definite
life are generally amortized on a straight-line basis to their residual value.
We evaluate our indefinite-lived intangible assets for impairment on an
annual basis or more often if an event occurs or circumstances change that
indicate impairments might exist. We perform our annual test for impairment
of our indefinite-lived intangible assets at the beginning of our fourth quarter.
We may elect to perform a qualitative assessment to determine whether
it is more likely than not that the fair value of an indefinite-lived intangible
asset is greater than its carrying value. If a qualitative assessment is not
performed, or if as a result of a qualitative assessment it is not more likely
than not that the fair value of an indefinite-lived intangible asset exceeds
its carrying value, then the asset’s fair value is compared to its carrying
value. Fair value is an estimate of the price a willing buyer would pay for
the intangible asset and is generally estimated by discounting the expected
future after-tax cash flows associated with the intangible asset�
Our definite-lived intangible assets that are not allocated to an individual
restaurant are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of the intangible asset may
not be recoverable. An intangible asset that is deemed not recoverable on
a undiscounted basis is written down to its estimated fair value, which is
our estimate of the price a willing buyer would pay for the intangible asset
based on discounted expected future after-tax cash flows� For purposes of