McDonalds 2015 Annual Report Download - page 28

26 McDonald's Corporation 2015 Annual Report
tax credits), which could result in a use of cash. This could also
result in a higher effective tax rate in the period in which such a
determination is made to repatriate prior period foreign earnings.
Refer to the Income Taxes note to the consolidated financial
statements for further information related to our income taxes and
the undistributed earnings of the Company's foreign subsidiaries.
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, 2015. See discussions of cash flows and financial
position and capital resources as well as the Notes to the
consolidated financial statements for further details.
Contractual cash outflows Contractual cash inflows
In millions Operating
leases
Debt
obligations(1) Minimum rent under
franchise arrangements
2016 $ 1,350 $ 2,628
2017 1,235 $ 1,065 2,534
2018 1,113 1,755 2,449
2019 1,001 3,844 2,355
2020 895 2,464 2,240
Thereafter 6,921 15,098 18,133
Total $12,515 $24,226 $30,339
(1) The maturities include reclassifications of short-term obligations to long-
term obligations of $2.4 billion, as they are supported by a long-term line
of credit agreement expiring in December 2019. Debt obligations do not
include the impact of noncash fair value hedging adjustments, deferred
debt costs, and accrued interest.
In the U.S., 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
Internal Revenue Service ("IRS") limitations. At December 31,
2015, total liabilities for the supplemental plans were $488 million.
In addition, total liabilities for gross unrecognized tax benefits
were $781 million at December 31, 2015.
There are certain purchase commitments that are not
recognized in the consolidated financial statements and are
primarily related to construction, inventory, energy, marketing and
other service related arrangements that occur in the normal
course of business. The amounts related to these commitments
are not significant to the Company’s financial position. Such
commitments are generally shorter term in nature and will be
funded from operating cash flows.
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.
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
current 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
revenue (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 equipment, 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
including 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 generally 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 value,
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 impairment
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 regarding 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 demographic
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, conducted in the fourth
quarter, approximately 5-10% of goodwill may be at risk of future
impairment as the fair values of certain reporting units were not
substantially in excess of their carrying amounts.