McDonalds 2010 Annual Report Download - page 25

CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has long-term contractual obligations primarily in
the form of lease obligations (related to both Company-operated
and franchised restaurants) and debt obligations. In addition, the
Company has long-term revenue and cash flow streams that
relate to its franchise arrangements. Cash provided by operations
(including cash provided by these franchise arrangements) along
with the Company’s borrowing capacity and other sources of
cash will be used to satisfy the obligations. The following table
summarizes the Company’s contractual obligations and their
aggregate maturities as well as future minimum rent payments
due to the Company under existing franchise arrangements as of
December 31, 2010. 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
2011 $ 1,200 $ 8 $ 2,349
2012 1,116 2,212 2,289
2013 1,034 1,007 2,216
2014 926 708 2,120
2015 827 675 2,001
Thereafter 6,018 6,818 15,379
Total $11,121 $11,428 $26,354
(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 March 2012. Debt obligations do not include $77 million of noncash fair
value hedging adjustments or $201 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. At
December 31, 2010, total liabilities for the supplemental plans
were $439 million. In addition, total liabilities for international
retirement plans were $153 million and the Company recorded
gross unrecognized tax benefits of $573 million.
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, which impact the assumed fair val-
ue, including the expected life of the stock option, the risk-free
interest rate, expected volatility of the Company’s stock over the
expected life and the expected dividend yield. 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
McDonald’s Corporation Annual Report 2010 23