Pizza Hut 2014 Annual Report Download - page 138

13MAR201517272138
PART II
ITEM 8 Financial Statements and Supplementary Data
affiliates. Thus, we do not consolidate these affiliates, instead months in the second and third quarters and four months in the fourth
accounting for them under the equity method. Our share of the net quarter. International businesses within our KFC, Pizza Hut and Taco
income or loss of those unconsolidated affiliates is included in Other Bell divisions close approximately one month earlier to facilitate
(income) expense. On February 1, 2012, we acquired an additional consolidated reporting. Our next fiscal year scheduled to include a
66% interest in Little Sheep Group Limited (‘‘Little Sheep’’), increasing 53rd week is 2016.
our ownership to 93%. As a result, we began consolidating this
Foreign Currency. The functional currency of our foreign entities is
business, which was previously accounted for using the equity
the currency of the primary economic environment in which the entity
method. See Note 4 for a further description of the accounting upon
operates. Functional currency determinations are made based upon a
acquisition of additional interest in Little Sheep. A meat processing
number of economic factors, including but not limited to cash flows
entity affiliated with our Little Sheep business is accounted for by the
and financing transactions. The operations, assets and liabilities of
equity method.
our entities outside the United States are initially measured using the
We report Net income attributable to non-controlling interests, which functional currency of that entity. Income and expense accounts for
includes the minority shareholders of the entities that operate the our operations of these foreign entities are then translated into U.S.
KFCs in Beijing and Shanghai, China and the minority shareholders of dollars at the average exchange rates prevailing during the period.
Little Sheep, separately on the face of our Consolidated Statements of Assets and liabilities of these foreign entities are then translated into
Income. The portion of equity not attributable to the Company for KFC U.S. dollars at exchange rates in effect at the balance sheet date. As
Beijing and KFC Shanghai is reported within equity, separately from of December 27, 2014, net cumulative translation adjustment gains of
the Company’s equity on the Consolidated Balance Sheets. The $29 million are recorded in Accumulated other comprehensive income
shareholder that owns the remaining 7% ownership interest in Little (loss) in the Consolidated Balance Sheet.
Sheep holds an option that, if exercised, requires us to redeem their
The majority of our foreign currency exposure is in countries where we
non-controlling interest. Redemption may occur any time after the
have company-owned restaurants. As we manage and share
third anniversary of the acquisition. This Redeemable non-controlling
resources at the individual brand level within a country, cumulative
interest is classified outside permanent equity and recorded in the
translation adjustments are recorded and tracked at the foreign-entity
Consolidated Balance Sheet as the greater of the initial carrying
level that represents the operations of our individual brands within that
amount adjusted for the non-controlling interest’s share of net income
country. Translation adjustments recorded in Accumulated other
(loss), or its redemption value.
comprehensive income (loss) are subsequently recognized as income
We participate in various advertising cooperatives with our or expense generally only upon sale of the related investment in a
franchisees and licensees established to collect and administer funds foreign entity, or upon a sale of assets and liabilities within a foreign
contributed for use in advertising and promotional programs designed entity that represents a complete or substantially complete liquidation
to increase sales and enhance the reputation of the Company and its of that entity. For purposes of determining whether a sale or complete
franchise owners. Contributions to the advertising cooperatives are or substantially complete liquidation of an investment in a foreign
required for both Company-owned and franchise restaurants and are entity has occurred, we consider those same foreign entities for which
generally based on a percentage of restaurant sales. We maintain we record and track cumulative translation adjustments.
certain variable interests in these cooperatives. As the cooperatives
Gains and losses arising from the impact of foreign currency
are required to spend all funds collected on advertising and
exchange rate fluctuations on transactions in foreign currency are
promotional programs, total equity at risk is not sufficient to permit the
included in Other (income) expense in our Consolidated Statement of
cooperatives to finance their activities without additional subordinated
Income.
financial support. Therefore, these cooperatives are VIEs. As a result
of our voting rights, we consolidate certain of these cooperatives for Reclassifications. We have reclassified certain items in the
which we are the primary beneficiary. Advertising cooperative assets, Consolidated Financial Statements for prior periods to be comparable
consisting primarily of cash received from the Company and with the classification for the fiscal year ended December 27, 2014.
franchisees and accounts receivable from franchisees, can only be These reclassifications had no effect on previously reported Net
used to settle obligations of the respective cooperative. Advertising Income – YUM! Brands, Inc.
cooperative liabilities represent the corresponding obligation arising
from the receipt of the contributions to purchase advertising and Franchise and License Operations. We execute franchise or
promotional programs for which creditors do not have recourse to the license agreements for each unit operated by third parties which set
general credit of the primary beneficiary. Therefore, we report all out the terms of our arrangement with the franchisee or licensee. Our
assets and liabilities of these advertising cooperatives that we franchise and license agreements typically require the franchisee or
consolidate as Advertising cooperative assets, restricted and licensee to pay an initial, non-refundable fee and continuing fees
Advertising cooperative liabilities in the Consolidated Balance Sheet. based upon a percentage of sales. Subject to our approval and their
As the contributions to these cooperatives are designated and payment of a renewal fee, a franchisee may generally renew the
segregated for advertising, we act as an agent for the franchisees and franchise agreement upon its expiration.
licensees with regard to these contributions. Thus, we do not reflect
franchisee and licensee contributions to these cooperatives in our The internal costs we incur to provide support services to our
Consolidated Statements of Income or Consolidated Statements of franchisees and licensees are charged to General and Administrative
Cash Flows. (‘‘G&A’’) expenses as incurred. Certain direct costs of our franchise
and license operations are charged to franchise and license
Fiscal Year. Our fiscal year ends on the last Saturday in December expenses. These costs include provisions for estimated uncollectible
and, as a result, a 53rd week is added every five or six years. The first fees, rent or depreciation expense associated with restaurants we
three quarters of each fiscal year consist of 12 weeks and the fourth lease or sublease to franchisees, franchise and license marketing
quarter consists of 16 weeks in fiscal years with 52 weeks and funding, amortization expense for franchise-related intangible assets
17 weeks in fiscal years with 53 weeks. Our subsidiaries operate on and certain other direct incremental franchise and license support
similar fiscal calendars except that China, India and certain other costs.
international subsidiaries operate on a monthly calendar, and thus
never have a 53rd week, with two months in the first quarter, three
44 YUM! BRANDS, INC. - 2014 Form 10-K
Form 10-K