Pizza Hut 2014 Annual Report Download - page 142

13MAR201517272138
PART II
ITEM 8 Financial Statements and Supplementary Data
If we record goodwill upon acquisition of a restaurant(s) from a not use derivative instruments for trading purposes and we have
franchisee and such restaurant(s) is then sold within two years of procedures in place to monitor and control their use.
acquisition, the goodwill associated with the acquired restaurant(s) is We record all derivative instruments on our Consolidated Balance
written off in its entirety. If the restaurant is refranchised two years or Sheet at fair value. For derivative instruments that are designated and
more subsequent to its acquisition, we include goodwill in the carrying qualify as a fair value hedge, the gain or loss on the derivative
amount of the restaurants disposed of based on the relative fair values instrument as well as the offsetting gain or loss on the hedged item
of the portion of the reporting unit disposed of in the refranchising and attributable to the hedged risk are recognized in the results of
the portion of the reporting unit that will be retained. The fair value of operations. For derivative instruments that are designated and qualify
the portion of the reporting unit disposed of in a refranchising is as a cash flow hedge, the effective portion of the gain or loss on the
determined by reference to the discounted value of the future cash derivative instrument is reported as a component of other
flows expected to be generated by the restaurant and retained by the comprehensive income (loss) and reclassified into earnings in the
franchisee, which includes a deduction for the anticipated, future same period or periods during which the hedged transaction affects
royalties the franchisee will pay us associated with the franchise earnings. For derivative instruments that are designated and qualify
agreement entered into simultaneously with the refranchising as a net investment hedge, the effective portion of the gain or loss on
transition. The fair value of the reporting unit retained is based on the the derivative instrument is reported in the foreign currency translation
price a willing buyer would pay for the reporting unit and includes the component of other comprehensive income (loss). Any ineffective
value of franchise agreements. Appropriate adjustments are made if a portion of the gain or loss on the derivative instrument for a cash flow
franchise agreement includes terms that are determined to not be at hedge or net investment hedge is recorded in the results of operations
prevailing market rates. As such, the fair value of the reporting unit immediately. For derivative instruments not designated as hedging
retained can include expected cash flows from future royalties from instruments, the gain or loss is recognized in the results of operations
those restaurants currently being refranchised, future royalties from immediately.
existing franchise businesses and company restaurant operations. As
a result, the percentage of a reporting unit’s goodwill that will be As a result of the use of derivative instruments, the Company is
written off in a refranchising transaction will be less than the exposed to risk that the counterparties will fail to meet their contractual
percentage of the reporting unit’s Company-owned restaurants that obligations. To mitigate the counterparty credit risk, we only enter into
are refranchised in that transaction and goodwill can be allocated to a contracts with carefully selected major financial institutions based
reporting unit with only franchise restaurants. upon their credit ratings and other factors, and continually assess the
creditworthiness of counterparties. At December 27, 2014 and
We evaluate the remaining useful life of an intangible asset that is not December 28, 2013, all of the counterparties to our interest rate
being amortized each reporting period to determine whether events swaps and foreign currency forwards had investment grade ratings
and circumstances continue to support an indefinite useful life. If an according to the three major ratings agencies. To date, all
intangible asset that is not being amortized is subsequently counterparties have performed in accordance with their contractual
determined to have a finite useful life, we amortize the intangible asset obligations.
prospectively over its estimated remaining useful life. Intangible
assets that are deemed to have a definite life are generally amortized Common Stock Share Repurchases. From time to time, we
on a straight-line basis to their residual value. repurchase shares of our Common Stock under share repurchase
programs authorized by our Board of Directors. Shares repurchased
We evaluate our indefinite-lived intangible assets for impairment on
constitute authorized, but unissued shares under the North Carolina
an annual basis or more often if an event occurs or circumstances
laws under which we are incorporated. Additionally, our Common
change that indicate impairments might exist. We perform our annual
Stock has no par or stated value. Accordingly, we record the full value
test for impairment of our indefinite-lived intangible assets at the
of share repurchases, upon the trade date, against Common Stock on
beginning of our fourth quarter. We may elect to perform a qualitative
our Consolidated Balance Sheet except when to do so would result in
assessment to determine whether it is more likely than not that the fair
a negative balance in such Common Stock account. In such
value of an indefinite-lived intangible asset is greater than its carrying
instances, on a period basis, we record the cost of any further share
value. If a qualitative assessment is not performed, or if as a result of a
repurchases as a reduction in retained earnings. Due to the large
qualitative assessment it is not more likely than not that the fair value
number of share repurchases and the increase in the market value of
of an indefinite-lived intangible asset exceeds its carrying value, then
our stock over the past several years, our Common Stock balance is
the asset’s fair value is compared to its carrying value. Fair value is an
frequently zero at the end of any period. Accordingly, $725 million,
estimate of the price a willing buyer would pay for the intangible asset
$640 million and $794 million in share repurchases were recorded as
and is generally estimated by discounting the expected future after-tax
a reduction in Retained Earnings in 2014, 2013 and 2012,
cash flows associated with the intangible asset.
respectively. See Note 15 for additional information on our share
Our definite-lived intangible assets that are not allocated to an repurchases.
individual restaurant are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of the Pension and Post-retirement Medical Benefits. We measure and
intangible asset may not be recoverable. An intangible asset that is recognize the overfunded or underfunded status of our pension and
deemed not recoverable on an undiscounted basis is written down to post-retirement plans as an asset or liability in our Consolidated
its estimated fair value, which is our estimate of the price a willing Balance Sheet as of our fiscal year end. The funded status represents
buyer would pay for the intangible asset based on discounted the difference between the projected benefit obligations and the fair
expected future after-tax cash flows. For purposes of our impairment value of plan assets, which is calculated on a plan-by-plan basis. The
analysis, we update the cash flows that were initially used to value the projected benefit obligation and related funded status are determined
definite-lived intangible asset to reflect our current estimates and using assumptions as of the end of each year. The projected benefit
assumptions over the asset’s future remaining life. obligation is the present value of benefits earned to date by plan
participants, including the effect of future salary increases, as
Derivative Financial Instruments. We use derivative instruments applicable. The difference between the projected benefit obligations
primarily to hedge interest rate and foreign currency risks. These and the fair value of plan assets that has not previously been
derivative contracts are entered into with financial institutions. We do
48 YUM! BRANDS, INC. - 2014 Form 10-K
Form 10-K