Pizza Hut 2014 Annual Report Download - page 139

PART II
ITEM 8 Financial Statements and Supplementary Data
Revenue Recognition. Revenues from Company-owned general liability, automobile liability, product liability and property
restaurants are recognized when payment is tendered at the time of losses (collectively, ‘‘property and casualty losses’’) are accrued when
sale. The Company presents sales net of sales-related taxes. Income deemed probable and reasonably estimable. Legal fees not related to
from our franchisees and licensees includes initial fees, continuing self-insured property and casualty losses are recognized as incurred.
fees, renewal fees and rental income from restaurants we lease or See Note 18 for further discussion of our legal proceedings.
sublease to them. We recognize initial fees received from a franchisee
Impairment or Disposal of Property, Plant and Equipment.
or licensee as revenue when we have performed substantially all
Property, plant and equipment (‘‘PP&E’’) is tested for impairment
initial services required by the franchise or license agreement, which
whenever events or changes in circumstances indicate that the
is generally upon the opening of a store. We recognize continuing
carrying value of the assets may not be recoverable. The assets are
fees, which are based upon a percentage of franchisee and licensee
not recoverable if their carrying value is less than the undiscounted
sales as those sales occur and rental income is recognized as it is
cash flows we expect to generate from such assets. If the assets are
earned. We recognize renewal fees when a renewal agreement with a
not deemed to be recoverable, impairment is measured based on the
franchisee or licensee becomes effective. We present initial fees
excess of their carrying value over their fair value.
collected upon the sale of a company-owned restaurant to a
franchisee in Refranchising (gain) loss. For purposes of impairment testing for our restaurants, we have
concluded that an individual restaurant is the lowest level of
While the majority of our franchise agreements are entered into with
independent cash flows unless our intent is to refranchise restaurants
terms and conditions consistent with those at a prevailing market rate,
as a group. We review our long-lived assets of such individual
there are instances when we enter into franchise agreements with
restaurants (primarily PP&E and allocated intangible assets subject to
terms that are not at market rates (for example, below-market
amortization) semi-annually for impairment, or whenever events or
continuing fees) for a specified period of time. We recognize the
changes in circumstances indicate that the carrying amount of a
estimated value of terms in franchise agreements entered into
restaurant may not be recoverable. We use two consecutive years of
concurrently with a refranchising transaction that are not consistent
operating losses as our primary indicator of potential impairment for
with market terms as part of the upfront refranchising gain (loss) and
our semi-annual impairment testing of these restaurant assets. We
amortize that amount into Franchise and license fees and income over
evaluate the recoverability of these restaurant assets by comparing
the period such terms are in effect. The value of terms that are not
the estimated undiscounted future cash flows, which are based on our
considered to be at market within franchise agreements is estimated
entity-specific assumptions, to the carrying value of such assets. For
based upon the difference between cash expected to be received
restaurant assets that are not deemed to be recoverable, we
under the franchise agreement and cash that would have been
write-down an impaired restaurant to its estimated fair value, which
expected to be received under a franchise agreement with terms
becomes its new cost basis. Fair value is an estimate of the price a
substantially consistent with market.
franchisee would pay for the restaurant and its related assets and is
Direct Marketing Costs. To the extent we participate in advertising determined by discounting the estimated future after-tax cash flows of
cooperatives, we expense our contributions as incurred which are the restaurant, which include a deduction for royalties we would
based on a percentage of sales. We charge direct marketing costs receive under a franchise agreement with terms substantially at
incurred outside of a cooperative to expense ratably in relation to market. The after-tax cash flows incorporate reasonable assumptions
revenues over the year in which incurred and, in the case of we believe a franchisee would make such as sales growth and margin
advertising production costs, in the year the advertisement is first improvement. The discount rate used in the fair value calculation is
shown. Deferred direct marketing costs, which are classified as our estimate of the required rate of return that a franchisee would
prepaid expenses, consist of media and related advertising expect to receive when purchasing a similar restaurant and the related
production costs which will generally be used for the first time in the long-lived assets. The discount rate incorporates rates of returns for
next fiscal year and have historically not been significant. Our historical refranchising market transactions and is commensurate with
advertising expenses were $589 million, $607 million and $608 million the risks and uncertainty inherent in the forecasted cash flows.
in 2014, 2013 and 2012, respectively. We report substantially all of our In executing our refranchising initiatives, we most often offer groups of
direct marketing costs in Occupancy and other operating expenses. restaurants for sale. When we believe it is more likely than not a
restaurant or groups of restaurants will be refranchised for a price less
Research and Development Expenses. Research and
than their carrying value, but do not believe the restaurant(s) have met
development expenses, which we expense as incurred, are reported
the criteria to be classified as held for sale, we review the restaurants
in G&A expenses. Research and development expenses were
for impairment. We evaluate the recoverability of these restaurant
$30 million, $31 million and $30 million in 2014, 2013 and 2012,
assets by comparing estimated sales proceeds plus holding period
respectively.
cash flows, if any, to the carrying value of the restaurant or group of
Share-Based Employee Compensation. We recognize all share- restaurants. For restaurant assets that are not deemed to be
based payments to employees, including grants of employee stock recoverable, we recognize impairment for any excess of carrying
options and stock appreciation rights (‘‘SARs’’), in the Consolidated value over the fair value of the restaurants, which is based on the
Financial Statements as compensation cost over the service period expected net sales proceeds. To the extent ongoing agreements to be
based on their fair value on the date of grant. This compensation cost entered into with the franchisee simultaneous with the refranchising
is recognized over the service period on a straight-line basis for are expected to contain terms, such as royalty rates, not at prevailing
awards that actually vest. We present this compensation cost market rates, we consider the off-market terms in our impairment
consistent with the other compensation costs for the employee evaluation. We recognize any such impairment charges in
recipient in either Payroll and employee benefits or G&A expenses. Refranchising (gain) loss.
See Note 14 for further discussion of our share-based compensation Refranchising (gain) loss includes the gains or losses from the sales of
plans. our restaurants to new and existing franchisees, including any
impairment charges discussed above, and the related initial franchise
Legal Costs. Settlement costs are accrued when they are deemed
fees. We recognize gains on restaurant refranchisings when the sale
probable and reasonably estimable. Anticipated legal fees related to
transaction closes, the franchisee has a minimum amount of the
self-insured workers’ compensation, employment practices liability,
YUM! BRANDS, INC. - 2014 Form 10-K 45
13MAR201516053226
Form 10-K