Pizza Hut 2004 Annual Report Download - page 46
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Please find page 46 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.See Note 2 for a further discussion of our policies
regardinggoodwillandindefinite-livedintangibleassets.
Allowances for Franchise and License Receivables and
ContingentLiabilities Wereserveafranchisee’sorlicens-
ee’s entire receivable balance based upon pre-defined
agingcriteriaandupontheoccurrenceofothereventsthat
indicatethatwemaynotcollectthebalancedue.Asaresult
ofreservingusingthismethodology,wehaveanimmaterial
amountofreceivablesthatarepastduethathavenotbeen
reservedforatDecember25,2004.
See Note 2 for a further discussion of our policies
regardingfranchiseandlicenseoperations.
Primarily as a result of our refranchising efforts, we
remain liable for certain lease assignments and guaran-
tees. We record a liability for our exposure under these
leaseassignmentsandguaranteeswhensuchexposureis
probableand estimable.AtDecember25,2004,wehave
recordedanimmaterialliabilityforourexposurewhichwe
considertobeprobableandestimable.Thepotentialtotal
exposureundersuchleasesissignificant,with$306million
representingthepresentvalue,discountedatourpre-taxcost
ofdebt,oftheminimumpaymentsoftheassignedleases
atDecember25,2004.Currentfranchiseesaretheprimary
lesseesunderthevastmajorityoftheseleases.Wegener-
allyhavecross-defaultprovisionswiththesefranchiseesthat
wouldputthemindefaultoftheirfranchiseagreementin
theeventofnon-paymentunderthelease.Webelievethese
cross-default provisions significantly reduce the risk that
wewillberequiredtomakepaymentsundertheseleases
and,historically,wehavenotbeenrequiredtomakesuch
paymentsinsignificantamounts.
See Note 24 for a further discussion of our lease
guarantees.
Self-Insured Property and Casualty Losses We record
ourbestestimateoftheremainingcosttosettleincurred
self-insuredpropertyandcasualtyclaims.Theestimateis
basedontheresultsofanindependentactuarialstudyand
considershistoricalclaimfrequencyandseverityaswellas
changesinfactorssuchasourbusinessenvironment,benefit
levels,medical costsand theregulatoryenvironmentthat
couldimpactoverallself-insurancecosts.Additionally,arisk
margintocoverunforeseeneventsthatmayoccuroverthe
severalyearsittakesforclaimstosettleisincludedinour
reserve,increasing ourconfidencelevelthattherecorded
reserveisadequate.
SeeNote24forafurtherdiscussionofourinsurance
programs.
PensionPlans Certainofouremployeesarecoveredunder
noncontributory defined benefit pension plans. The most
significantoftheseplanswasamendedin2001suchthat
employeeshiredafterSeptember30,2001arenoteligible
toparticipate.AsofourSeptember30,2004measurement
date,theseplanshadaprojectedbenefitobligation(“PBO”)
of$700million,anaccumulatedbenefitobligation(“ABO”)of
$629millionandafairvalueofplanassetsof$518million.
Asaresult ofthe$111millionunderfundedstatusof the
plansrelativetotheABOatSeptember30,2004,wehave
recordedacumulative $95millionchargetoaccumulated
othercomprehensiveloss(netoftaxof$58million)asof
December25,2004.
ThePBOandABOreflecttheactuarialpresentvalueofall
benefitsearnedtodatebyemployees.ThePBOincorporates
assumptionsastofuturecompensationlevelswhiletheABO
reflectsonlycurrentcompensationlevels.Duetotherela-
tivelylongtimeframeoverwhichbenefitsearnedtodateare
expectedtobepaid,ourPBOandABOarehighlysensitiveto
changesindiscountrates.WemeasuredourPBOandABO
usingadiscountrateof6.15%atSeptember30,2004.This
discountratewasdeterminedusingahypotheticalportfolio
ofhigh-qualitydebtinstrumentswithmaturitiesthatmirror
ourexpectedbenefitobligationsundertheplans.A50basis
pointincreaseinthisdiscountratewouldhavedecreasedour
PBObyapproximately$63millionatSeptember30,2004.
Conversely,a50basispointdecreaseinthisdiscountrate
wouldhaveincreasedourPBObyapproximately$65million
atSeptember30,2004.
Thepension expense wewillrecord in 2005 is also
impacted by the discount rate we selected at September
30,2004.Intotal,weexpectpensionexpensetoincrease
approximately$3millionto$56millionin2005.Theincrease
isprimarilydrivenbyanincreaseininterestcostbecauseof
thehigherPBO.Servicecostwillalsoincreaseasaresultof
thelowerdiscountrate,though,aspreviouslymentioned,the
plansareclosedtonewparticipants.A50basispointchange
inourdiscountrateassumptionof6.15%atSeptember30,
2004wouldimpactour2005pensionexpensebyapproxi-
mately$12million.
Theassumptionwemakeregardingourexpectedlong-
termrateofreturnonplanassetsalsoimpactsourpension
expense.Ourexpectedlong-termrateofreturnonplanassets
atbothSeptember30,2004andSeptember30,2003was
8.5%.Webelievethatthisassumptionisappropriategiventhe
compositionofourplanassetsandhistoricalmarketreturns
thereon.Givennochangetothemarket-relatedvalueofour
planassetsasofSeptember30,2004,aonepercentage
pointincreaseordecreaseinourexpectedrateofreturnon
planassetsassumptionwoulddecreaseorincrease,respec-
tively, our 2005 pension plan expense by approximately
$5million.
Thelossesourplanassetshaveexperienced,alongwith
thedecreaseindiscountrates,havelargelycontributedtoan
unrecognizedactuariallossof$225millioninourplansas
ofSeptember30,2004.Forpurposesofdetermining2004
expense,ourfundedstatuswas suchthatwe recognized
$19millionofunrecognizedactuariallossin2004.Wewill
recognizeapproximately$22millionofunrecognizedactu-
ariallossin2005.Givennochangetotheassumptionsat
ourSeptember30,2004measurementdate,actuarialloss
recognitionwillremainatanamountnearthattoberecog-
nizedin2005overthenextfewyearsbeforeitbeginsto
graduallydecline.
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