Pizza Hut 2004 Annual Report Download - page 45
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Please find page 45 of the 2004 Pizza Hut annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.CRITICALACCOUNTINGPOLICIESANDESTIMATES
Our reported results are impacted by the application of
certainaccountingpoliciesthatrequireustomakesubjective
orcomplexjudgments.Thesejudgmentsinvolveestimations
oftheeffectofmattersthatareinherentlyuncertainandmay
significantlyimpactourquarterlyorannualresultsofopera-
tionsorfinancialcondition.Changesintheestimatesand
judgmentscouldsignificantlyaffectourresultsofoperations,
financialconditionandcashflowsinfutureyears.Adescrip-
tionofwhatweconsidertobeourmostsignificantcritical
accountingpoliciesfollows.
ImpairmentorDisposalofLong-LivedAssets Weevaluate
ourlong-livedassetsforimpairmentattheindividualrestau-
rantlevelexceptwhenthereisanexpectationthatwewill
refranchise restaurantsasagroup.Restaurantsheldand
usedareevaluatedforimpairmentonasemi-annualbasisor
whenevereventsorcircumstancesindicatethatthecarrying
amountofarestaurantmaynotberecoverable(includinga
decisiontoclosearestaurantoranoffertorefranchisea
restaurantorgroupofrestaurantsforlessthanthecarrying
value).Oursemi-annualtestincludesthoserestaurantsthat
haveexperiencedtwoconsecutiveyearsofoperatinglosses.
Theseimpairmentevaluationsrequireanestimationofcash
flowsovertheremainingusefullifeoftheprimaryassetof
therestaurant,whichcanbeforaperiodofover20years,
andanyterminalvalue.Welimitassumptionsaboutimpor-
tantfactorssuchassalesgrowthandmarginimprovementto
thosethataresupportablebaseduponourplansfortheunit
andactualresultsatcomparablerestaurants.
Ifthelong-livedassetsofarestaurantonaheldand
used basis are not recoverable based upon forecasted,
undiscounted cash flows, we write the assets down to
theirfairvalue.Thisfairvalueisdeterminedbydiscounting
theforecastedcashflows,includingterminalvalue,ofthe
restaurantatanappropriaterate.Thediscountrateused
isourcostofcapital,adjustedupwardwhenahigherriskis
believedtoexist.
Whenitisprobablethatwewillsellarestaurantwithin
one year, we write down the restaurant to its fair value.
Weoftenrefranchiserestaurantsingroupsand,therefore,
performsuchimpairmentevaluationsatthegrouplevel.Fair
valueisbasedontheexpectedsalesproceedslessappli-
cabletransactioncosts.Estimatedsalesproceedsarebased
onthemostrelevantofhistoricalsalesmultiplesorbidsfrom
buyers,andhavehistoricallybeenreasonablyaccurateesti-
mationsoftheproceedsultimatelyreceived.
SeeNote2forafurtherdiscussionofourpolicyregarding
theimpairmentordisposaloflong-livedassets.
ImpairmentofInvestmentsinUnconsolidatedAffiliates We
recordimpairment chargesrelatedtoaninvestmentin an
unconsolidatedaffiliatewhenevereventsorcircumstances
indicatethatadecreaseinthevalueofaninvestmenthas
occurred which is other than temporary. In addition, we
evaluate our investments in unconsolidated affiliates for
impairment when theyhaveexperiencedtwo consecutive
yearsofoperatinglosses.Ourimpairmentmeasurementtest
foraninvestmentinanunconsolidatedaffiliateissimilarto
thatforourrestaurantsexceptthatweusediscountedcash
flows after interestand taxesinsteadofdiscounted cash
flowsbeforeinterestandtaxesasusedforourrestaurants.
Thefairvaluesofourinvestmentsinunconsolidatedaffiliates
aregenerallysignificantlyinexcessoftheircarryingvalue.
SeeNote2forafurtherdiscussionofourpolicyregarding
theimpairmentofinvestmentsinunconsolidatedaffiliates.
Impairment of Goodwill and Indefinite-Lived Intangible
Assets Weevaluategoodwillandindefinite-livedintangible
assets for impairment on an annual basis or more often
ifaneventoccursorcircumstanceschangethatindicates
impairmentmightexist.Goodwillisevaluatedforimpairment
throughthecomparisonoffairvalueofourreportingunitsto
theircarryingvalues.Ourreportingunitsareouroperating
segmentsintheU.S.andourbusinessmanagementunits
internationally(typicallyindividualcountries).Fairvalueisthe
priceawillingbuyerwouldpayforthereportingunit,andis
generallyestimatedbydiscountingexpectedfuturecashflows
fromthereportingunitovertwentyyearsplusanexpected
terminalvalue.Welimitassumptionsaboutimportantfactors
suchassalesgrowthandmarginimprovementtothosethat
aresupportablebaseduponourplansforthereportingunit.
For 2004, there was no impairment of goodwill identified
duringourannualimpairmenttesting.
Ourimpairmenttestforindefinite-livedintangibleassets
consistsofacomparisonofthefairvalueoftheassetwith
itscarryingamount.Ourindefinite-livedintangibleassets
consistofvaluesassignedtocertaintrademarks/brandsof
whichwehaveacquiredownership.Webelievethevalueof
thesetrademarks/brandsisderivedfromtheroyaltyweavoid,
inthecaseofCompanystores,orreceive,inthecaseoffran-
chisestores,duetoourownershipofthetrademarks/brands.
Thus,anticipatedsalesarethemostimportantassumption
invaluingtrademarks/brands.Welimitassumptionsabout
salesgrowth,aswellasotherfactorsimpactingthefairvalue
calculation,tothosethataresupportablebasedonourplans
fortheapplicableConcept.
Themostsignificantindefinite-livedtrademark/brand
assetwehaverecordedistheLJStrademark/brandinthe
amountof $140million.Thefairvalueofthis trademark/
brandiscurrentlyinexcessofitscarryingvalueasarethe
fairvaluesofallotherrecordedtrademarks/brandswithan
indefinitelife.Whilewebelievethesalesassumptionsused
inourdeterminationsoffairvalueforourtrademarks/brands
areconsistentwithouroperatingplansandforecasts,fluctua-
tionsintheassumptionswouldhaveimpactedourimpairment
calculation.Ifthelong-termrateofsalesgrowthusedineach
ofourfairvaluedeterminationsforourtrademarks/brands
hadbeenonepercentagepointlower,suchfairvalueswould
havecontinuedtoexceedcarryingvalueinallinstances.
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Yum!Brands,Inc.