Pizza Hut 2014 Annual Report Download - page 140

13MAR201517272138
PART II
ITEM 8 Financial Statements and Supplementary Data
purchase price in at-risk equity and we are satisfied that the all or a portion of an asset will not be realized, we record a valuation
franchisee can meet its financial obligations. allowance.
When we decide to close a restaurant, it is reviewed for impairment We recognize the benefit of positions taken or expected to be taken in
and depreciable lives are adjusted based on the expected disposal our tax returns in our Income tax provision when it is more likely than
date. Other costs incurred when closing a restaurant such as costs of not (i.e. a likelihood of more than fifty percent) that the position would
disposing of the assets as well as other facility-related expenses from be sustained upon examination by tax authorities. A recognized tax
previously closed stores are generally expensed as incurred. position is then measured at the largest amount of benefit that is
Additionally, at the date we cease using a property under an operating greater than fifty percent likely of being realized upon settlement. We
lease, we record a liability for the net present value of any remaining evaluate these amounts on a quarterly basis to ensure that they have
lease obligations, net of estimated sublease income, if any. Any costs been appropriately adjusted for audit settlements and other events we
recorded upon store closure as well as any subsequent adjustments believe may impact the outcome. Changes in judgment that result in
to liabilities for remaining lease obligations as a result of lease subsequent recognition, derecognition or a change in measurement
termination or changes in estimates of sublease income are recorded of a tax position taken in a prior annual period (including any related
in Closures and impairment (income) expenses. To the extent we sell interest and penalties) are recognized as a discrete item in the interim
assets, primarily land, associated with a closed store, any gain or loss period in which the change occurs. We recognize accrued interest and
upon that sale is also recorded in Closures and impairment (income) penalties related to unrecognized tax benefits as components of our
expenses. Income tax provision.
Considerable management judgment is necessary to estimate future We do not record a U.S. deferred tax liability for the excess of the book
cash flows, including cash flows from continuing use, terminal value, basis over the tax basis of our investments in foreign subsidiaries to
sublease income and refranchising proceeds. Accordingly, actual the extent that the basis difference results from earnings that meet the
results could vary significantly from our estimates. indefinite reversal criteria. This criteria is met if the foreign subsidiary
has invested, or will invest, the undistributed earnings indefinitely. The
Impairment of Investments in Unconsolidated Affiliates. We decision as to the amount of undistributed earnings that we intend to
record impairment charges related to an investment in an maintain in non-U.S. subsidiaries considers items including, but not
unconsolidated affiliate whenever events or circumstances indicate limited to, forecasts and budgets of financial needs of cash for working
that a decrease in the fair value of an investment has occurred which capital, liquidity plans and expected cash requirements in the United
is other than temporary. In addition, we evaluate our investments in States.
unconsolidated affiliates for impairment when they have experienced
See Note 16 for a further discussion of our income taxes.
two consecutive years of operating losses. In 2014, we recorded a
$5 million impairment of our investment in a meat processing entity Fair Value Measurements. Fair value is the price we would receive
affiliated with our Little Sheep business. See Note 4 for further to sell an asset or pay to transfer a liability (exit price) in an orderly
discussion of the impairment charge. No other impairment associated transaction between market participants. For those assets and
with our investments in unconsolidated affiliates was recorded during liabilities we record or disclose at fair value, we determine fair value
2014, 2013 or 2012. based upon the quoted market price, if available. If a quoted market
price is not available for identical assets, we determine fair value
Guarantees. We recognize, at inception of a guarantee, a liability
based upon the quoted market price of similar assets or the present
for the fair value of certain obligations undertaken. The majority of our
value of expected future cash flows considering the risks involved,
guarantees are issued as a result of assigning our interest in
including counterparty performance risk if appropriate, and using
obligations under operating leases as a condition to the refranchising
discount rates appropriate for the duration. The fair values are
of certain Company restaurants. We recognize a liability for the fair
assigned a level within the fair value hierarchy, depending on the
value of such lease guarantees upon refranchising and upon
source of the inputs into the calculation.
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 Level 1 Inputs based upon quoted prices in active
expense and subsequent changes in the guarantees for other markets for identical assets.
franchise support guarantees not associated with a refranchising Level 2 Inputs other than quoted prices included within
transaction are included in Franchise and license expense. Level 1 that are observable for the asset, either
directly or indirectly.
Income Taxes. We record deferred tax assets and liabilities for the Level 3 Inputs that are unobservable for the asset.
future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets
Cash and Cash Equivalents. Cash equivalents represent funds we
and liabilities and their respective tax bases as well as operating loss,
have temporarily invested (with original maturities not exceeding three
capital loss and tax credit carryforwards. Deferred tax assets and
months), including short-term, highly liquid debt securities. Cash and
liabilities are measured using enacted tax rates expected to apply to
overdraft balances that meet the criteria for right to offset are
taxable income in the years in which those differences or
presented net on our Consolidated Balance Sheet.
carryforwards are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is Receivables. The Company’s receivables are primarily generated
recognized in income in the period that includes the enactment date. from ongoing business relationships with our franchisees and
Additionally, in determining the need for recording a valuation licensees as a result of franchise, license and lease agreements.
allowance against the carrying amount of deferred tax assets, we Trade receivables consisting of royalties from franchisees and
consider the amount of taxable income and periods over which it must licensees are generally due within 30 days of the period in which the
be earned, actual levels of past taxable income and known trends and corresponding sales occur and are classified as Accounts and notes
events or transactions that are expected to affect future levels of receivable on our Consolidated Balance Sheet. Our provision for
taxable income. Where we determine that it is more likely than not that uncollectible franchise and licensee receivable balances is based
upon pre-defined aging criteria or upon the occurrence of other events
46 YUM! BRANDS, INC. - 2014 Form 10-K
Form 10-K