McDonalds 2009 Annual Report Download - page 27

December 31, 2009. See discussions of cash flows and financial
position and capital resources as well as the Notes to the con-
solidated financial statements for further details.
Contractual cash outflows Contractual cash inflows
In millions Operating leases Debt obligations(1) Minimum rent under franchise arrangements
2010 $ 1,119 $ 18 $ 2,294
2011 1,047 613 2,220
2012 963 2,188 2,156
2013 885 658 2,078
2014 806 460 1,987
Thereafter 5,897 6,562 15,278
Total $10,717 $10,499 $26,013
(1) The maturities reflect reclassifications of short-term obligations to long-term obliga-
tions of $1.2 billion, as they are supported by a long-term line of credit agreement
expiring in 2012. Debt obligations do not include $80 million of noncash fair value
hedging adjustments because these adjustments have no impact on the obligation at
maturity, as well as $196 million of accrued interest.
The Company maintains certain supplemental benefit plans
that allow participants to (i) make tax-deferred contributions and
(ii) receive Company-provided allocations that cannot be made
under the qualified benefit plans because of IRS limitations. The
investment alternatives and returns are based on certain market-
rate investment alternatives under the Company’s qualified Profit
Sharing and Savings Plan. Total liabilities for the supplemental
plans were $397 million at December 31, 2009 and are
reflected on McDonald’s Consolidated balance sheet as follows:
other long-term liabilities–$362 million, and accrued payroll and
other liabilities–$35 million. Total liabilities for international
retirement plans at December 31, 2009 were $184 million and
were primarily reflected in other long-term liabilities. The Com-
pany has also recorded $492 million of gross unrecognized tax
benefits at December 31, 2009, of which $286 million is
included in other long-term liabilities and $206 million is included
in deferred income taxes on the Consolidated balance sheet.
Other Matters
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and
results of operations is based upon the Company’s consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the U.S. The
preparation of these financial statements requires the Company
to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses as well as
related disclosures. On an ongoing basis, the Company evaluates
its estimates and judgments based on historical experience and
various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates
under various assumptions or conditions.
The Company reviews its financial reporting and disclosure
practices and accounting policies quarterly to ensure that they
provide accurate and transparent information relative to the cur-
rent economic and business environment. The Company believes
that of its significant accounting policies, the following involve a
higher degree of judgment and/or complexity:
• Property and equipment
Property and equipment are depreciated or amortized on a
straight-line basis over their useful lives based on management’s
estimates of the period over which the assets will generate rev-
enue (not to exceed lease term plus options for leased property).
The useful lives are estimated based on historical experience
with similar assets, taking into account anticipated technological
or other changes. The Company periodically reviews these lives
relative to physical factors, economic factors and industry trends.
If there are changes in the planned use of property and equip-
ment, or if technological changes occur more rapidly than
anticipated, the useful lives assigned to these assets may need to
be shortened, resulting in the accelerated recognition of
depreciation and amortization expense or write-offs in future
periods.
• Share-based compensation
The Company has a share-based compensation plan which
authorizes the granting of various equity-based incentives includ-
ing stock options and restricted stock units (RSUs) to employees
and nonemployee directors. The expense for these equity-based
incentives is based on their fair value at date of grant and gen-
erally amortized over their vesting period.
The fair value of each stock option granted is estimated on
the date of grant using a closed-form pricing model. The pricing
model requires assumptions, such as the expected life of the
stock option, the risk-free interest rate and expected volatility of
the Company’s stock over the expected life, which significantly
impact the assumed fair value. The Company uses historical data
to determine these assumptions and if these assumptions
change significantly for future grants, share-based compensation
expense will fluctuate in future years. The fair value of each RSU
granted is equal to the market price of the Company’s stock at
date of grant less the present value of expected dividends over
the vesting period.
• Long-lived assets impairment review
Long-lived assets (including goodwill) are reviewed for impair-
ment annually in the fourth quarter and whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. In assessing the recoverability of
the Company’s long-lived assets, the Company considers
changes in economic conditions and makes assumptions regard-
ing estimated future cash flows and other factors. Estimates of
future cash flows are highly subjective judgments based on the
Company’s experience and knowledge of its operations. These
estimates can be significantly impacted by many factors including
changes in global and local business and economic conditions,
operating costs, inflation, competition, and consumer and demo-
graphic trends. A key assumption impacting estimated future
cash flows is the estimated change in comparable sales. If the
Company’s estimates or underlying assumptions change in the
future, the Company may be required to record impairment
charges. Based on the annual goodwill impairment test, con-
ducted in the fourth quarter, the Company does not have any
reporting units (defined as each individual country) with goodwill
currently at risk of impairment.
When the Company sells an existing business to a devel-
opmental licensee, it determines when these businesses are
“held for sale” in accordance with guidance on the impairment or
disposal of long-lived assets. Impairment charges on assets held
for sale are recognized when management and, if required, the
Company’s Board of Directors have approved and committed to a
McDonald’s Corporation Annual Report 2009 25