Pizza Hut 2014 Annual Report Download - page 141

PART II
ITEM 8 Financial Statements and Supplementary Data
that indicate that we may not collect the balance due. Additionally, we lease. The primary penalty to which we are subject is the economic
monitor the financial condition of our franchisees and licensees and detriment associated with the existence of leasehold improvements
record provisions for estimated losses on receivables when we which might be impaired if we choose not to continue the use of the
believe it probable that our franchisees or licensees will be unable to leased property. Leasehold improvements, which are a component of
make their required payments. While we use the best information buildings and improvements described above, are amortized over the
available in making our determination, the ultimate recovery of shorter of their estimated useful lives or the lease term. We generally
recorded receivables is also dependent upon future economic events do not receive leasehold improvement incentives upon opening a
and other conditions that may be beyond our control. We recorded store that is subject to a lease.
$3 million in net provisions, $2 million in net provisions and $1 million We expense rent associated with leased land or buildings while a
in net recoveries within Franchise and license expenses in 2014, 2013 restaurant is being constructed whether rent is paid or we are subject
and 2012, respectively, related to uncollectible franchise and license to a rent holiday. Additionally, certain of the Company’s operating
trade receivables. Trade receivables that are ultimately deemed to be leases contain predetermined fixed escalations of the minimum rent
uncollectible, and for which collection efforts have been exhausted, during the lease term. For leases with fixed escalating payments
are written off against the allowance for doubtful accounts. and/or rent holidays, we record rent expense on a straight-line basis
over the lease term, including any option periods considered in the
2014 2013 determination of that lease term. Contingent rentals are generally
Accounts and notes receivable $ 337 $ 330 based on sales levels in excess of stipulated amounts, and thus are
Allowance for doubtful accounts (12) (11) not considered minimum lease payments and are included in rent
expense when attainment of the contingency is considered probable
Accounts and notes receivable, net $ 325 $ 319
(e.g. when Company sales occur).
Our financing receivables primarily consist of notes receivables and Internal Development Costs and Abandoned Site Costs. We
direct financing leases with franchisees which we enter into from time capitalize direct costs associated with the site acquisition and
to time. As these receivables primarily relate to our ongoing business construction of a Company unit on that site, including direct internal
agreements with franchisees and licensees, we consider such payroll and payroll-related costs. Only those site-specific costs
receivables to have similar risk characteristics and evaluate them as incurred subsequent to the time that the site acquisition is considered
one collective portfolio segment and class for determining the probable are capitalized. If we subsequently make a determination
allowance for doubtful accounts. We monitor the financial condition of that it is probable a site for which internal development costs have
our franchisees and licensees and record provisions for estimated been capitalized will not be acquired or developed, any previously
losses on receivables when we believe it is probable that our capitalized internal development costs are expensed and included in
franchisees or licensees will be unable to make their required G&A expenses.
payments. Balances of notes receivable and direct financing leases
due within one year are included in Accounts and notes receivable Goodwill and Intangible Assets. From time to time, the Company
while amounts due beyond one year are included in Other assets. acquires restaurants from one of our Concept’s franchisees or
Amounts included in Other assets totaled $21 million (net of an acquires another business. Goodwill from these acquisitions
allowance of $1 million) and $22 million (net of an allowance of represents the excess of the cost of a business acquired over the net
$1 million) at December 27, 2014 and December 28, 2013, of the amounts assigned to assets acquired, including identifiable
respectively. Financing receivables that are ultimately deemed to be intangible assets and liabilities assumed. Goodwill is not amortized
uncollectible, and for which collection efforts have been exhausted, and has been assigned to reporting units for purposes of impairment
are written off against the allowance for doubtful accounts. Interest testing. Our reporting units are business units (which are aligned
income recorded on financing receivables has traditionally been based on geography) in our KFC, Pizza Hut and Taco Bell Divisions
insignificant. and individual brands in our India and China Divisions.
Inventories. We value our inventories at the lower of cost We evaluate goodwill for impairment on an annual basis or more often
(computed on the first-in, first-out method) or market. if an event occurs or circumstances change that indicate impairment
might exist. We have selected the beginning of our fourth quarter as
Property, Plant and Equipment. We state PP&E at cost less the date on which to perform our ongoing annual impairment test for
accumulated depreciation and amortization. We calculate goodwill. We may elect to perform a qualitative assessment for our
depreciation and amortization on a straight-line basis over the reporting units to determine whether it is more likely than not that the
estimated useful lives of the assets as follows: 5 to 25 years for fair value of the reporting unit is greater than its carrying value. If a
buildings and improvements, 3 to 20 years for machinery and qualitative assessment is not performed, or if as a result of a
equipment and 3 to 7 years for capitalized software costs. We qualitative assessment it is not more likely than not that the fair value
suspend depreciation and amortization on assets related to of a reporting unit exceeds its carrying value, then the reporting unit’s
restaurants that are held for sale. 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
Leases and Leasehold Improvements. The Company leases using discounted expected future after-tax cash flows from Company-
land, buildings or both for certain of its restaurants worldwide. The owned restaurant operations and franchise royalties. The discount
length of our lease terms, which vary by country and often include rate is our estimate of the required rate of return that a third-party
renewal options, are an important factor in determining the buyer would expect to receive when purchasing a business from us
appropriate accounting for leases including the initial classification of that constitutes a reporting unit. We believe the discount rate is
the lease as capital or operating and the timing of recognition of rent commensurate with the risks and uncertainty inherent in the
expense over the duration of the lease. We include renewal option forecasted cash flows. If the carrying value of a reporting unit exceeds
periods in determining the term of our leases when failure to renew the its fair value, goodwill is written down to its implied fair value.
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
YUM! BRANDS, INC. - 2014 Form 10-K 47
13MAR201516053226
Form 10-K