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Items Affecting Comparability of Net Income and Cash Flows | 12 Months Ended
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Dec. 28, 2013
Items Affecting Comparability Of Net Income And Cash Flows Disclosure [Abstract] |
Items Affecting Comparability of Net Income and Cash Flows | Items Affecting Comparability of Net Income and Cash Flows Little Sheep Acquisition and Subsequent Impairment On February 1, 2012 we acquired an additional 66% interest in Little Sheep Group Limited (“Little Sheep”) for $540 million, net of cash acquired of $44 million, increasing our ownership to 93%. The acquisition was driven by our strategy to build leading brands across China in every significant category. Prior to our acquisition of this additional interest, our 27% interest in Little Sheep was accounted for under the equity method of accounting. As a result of the acquisition we obtained voting control of Little Sheep, and thus we began consolidating Little Sheep upon acquisition. As required by GAAP, we remeasured our previously held 27% ownership in Little Sheep, which had a recorded value of $107 million at the date of acquisition, at fair value based on Little Sheep's traded share price immediately prior to our offer to purchase the business and recognized a non-cash gain of $74 million. This gain, which resulted in no related income tax expense, was recorded in Other (income) expense on our Consolidated Statement of Income in 2012 and was not allocated to any segment for performance reporting purposes. We recorded the following assets acquired and liabilities assumed upon acquisition of Little Sheep as a result of our purchase price allocation:
| Current assets, including cash of $44 |  | $ | 109 |
| Property, plant and equipment |  | 64 |
| Goodwill |  | 376 |
| Intangible assets, including indefinite-lived trademark of $404 |  | 421 |
| Other assets |  | 35 |
| Total assets acquired |  | 1,005 |
| Deferred taxes |  | 105 |
| Other liabilities |  | 60 |
| Total liabilities assumed |  | 165 |
| Redeemable noncontrolling interest |  | 59 |
| Other noncontrolling interests |  | 16 |
| Net assets acquired |  | $ | 765 |
The fair values of intangible assets were determined using an income approach based on expected cash flows. The goodwill recorded resulted from the value expected to be generated from applying YUM's processes and knowledge in China, including YUM's development capabilities, to the Little Sheep business. The goodwill is not expected to be deductible for income tax purposes and has been allocated to the China operating segment. As part of the acquisition, YUM granted an option to the shareholder that holds the remaining 7% ownership interest in Little Sheep that would require us to purchase their remaining shares owned upon exercise, which may occur any time after the third anniversary of the acquisition. This noncontrolling interest has been recorded as a Redeemable noncontrolling interest in the Consolidated Balance Sheet. The Redeemable noncontrolling interest was reported at its fair value of $59 million at the date of acquisition, which was based on the Little Sheep traded share price immediately subsequent to our offer to purchase the additional interest. Under the equity method of accounting, we previously reported our 27% share of the net income of Little Sheep as Other (income) expense in the Consolidated Statements of Income. Since the acquisition, we have reported Little Sheep's results of operations in the appropriate line items of our Consolidated Statement of Income. We no longer report Other (income) expense as we did under the equity method of accounting. Net income attributable to our partner's ownership percentage is recorded in Net Income (loss) - noncontrolling interests. Little Sheep reports on a one month lag, and as a result, their consolidated results were included in the China Division starting the second quarter of 2012. In 2012, the consolidation of Little Sheep increased China Division Revenues by 4% and did not have a significant impact on China Division Operating Profit versus 2011. The purchase price paid for the additional 66% interest and the resulting purchase price allocation assumed same-store sales growth and new unit development for the brand. Little Sheep's sales were negatively impacted by a longer than expected purchase approval and ownership transition phase. Our efforts to regain sales momentum were significantly compromised in May 2013 due to negative publicity regarding quality issues with unrelated hot pot concepts in China, even though there was not an issue with the quality of Little Sheep products. The sustained declines in sales and profits that began in May 2013 and continued through the third quarter, coupled with the anticipated time it will now take for the business to recover, resulted in a determination during the quarter ended September 7, 2013 that it is not more likely than not that the Little Sheep trademark and reporting unit fair values are in excess of their carrying values. Therefore, our Little Sheep trademark and goodwill were tested for impairment in the quarter ended September 7, 2013, prior to the annual impairment reviews performed at the beginning of the fourth quarter of each year in accordance with our accounting policy. As a result of comparing the trademark’s fair value of $345 million to its carrying value of $414 million, an impairment charge of $69 million was recorded in the quarter ended September 7, 2013. Additionally, after determining the fair value of the Little Sheep reporting unit was less than its carrying value, goodwill was written down to $162 million, resulting in an impairment charge of $222 million. The Company also evaluated other Little Sheep long-lived assets for impairment and recorded a $4 million impairment charge related to restaurant-level PP&E. These non-cash impairment charges totalling $295 million were recorded in Closures and impairment (income) expense on our Consolidated Statement of Income and were not allocated to any segment for performance reporting purposes, consistent with the classification of the $74 million gain that was recorded upon acquisition. We recorded an $18 million tax benefit associated with these impairments and allocated $19 million of the net impairment charges to Net Income (loss) - noncontrolling interests, which resulted in a net impairment charge of $258 million allocated to Net Income - YUM! Brands, Inc. The fair values of the Little Sheep trademark and reporting unit were based on the estimated prices a willing buyer would pay. The fair value of the trademark was determined using a relief from royalty valuation approach that included future estimated sales as a significant input. The reporting unit fair value was determined using an income approach with future cash flow estimates generated by the business as a significant input. Future cash flow estimates are impacted by new unit development, sales growth and margin improvement. Both fair values incorporated a discount rate of 13% as our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing the Little Sheep trademark or reporting unit. The inputs used in determining the fair values of the Little Sheep trademark and reporting unit assumed that the business will recover to pre-acquisition average-unit sales volumes and profit levels over the next three years. At such pre-acquisition sales and profit levels, we believe that the Little Sheep restaurant-level unit economics will support the new unit development we assumed in the fair value estimations of the trademark and reporting unit. Long-term average growth assumptions subsequent to this assumed recovery include same-store-sales growth of 4% and average annual net unit growth of approximately 75 units. Losses Related to the Extinguishment of Debt During the fourth quarter of 2013, we completed a cash tender offer to repurchase $550 million of our Senior Unsecured Notes due either March 2018 or November 2037. This transaction resulted in $120 million of losses as a result of premiums paid and other costs, $118 million of which was classified as Interest expense, net in our Consolidated Statement of Income. The repurchase of the Senior Unsecured Notes was funded primarily by proceeds of $599 million received from the issuance of new Senior Unsecured Notes. See Note 10 for further discussion on the issuance of Senior Unsecured Notes. Pension Settlement Charges During the fourth quarter of 2012 and continuing through 2013, the Company allowed certain former employees with deferred vested balances in our U.S. pension plans an opportunity to voluntarily elect an early payout of their pension benefits. The majority of these payouts were funded from existing pension plan assets. As a result of settlement payments exceeding the sum of service and interest costs within these U.S. pension plans in 2013 and 2012, pursuant to our accounting policy we recorded pre-tax settlement charges of $30 million and $89 million for the years ended December 28, 2013 and December 29, 2012, respectively, in General and administrative expenses. These amounts included settlement charges of $10 million and $84 million in the years ended December 28, 2013 and December 29, 2012, respectively, related to the programs discussed above that were not allocated for performance reporting purposes. See Note 14 for further discussion of our pension plans. U.S. Business Transformation As part of our plan to transform our U.S. business we took several measures in 2013, 2012 and 2011 ("the U.S. business transformation measures"). These measures included: continuation of our U.S. refranchising; G&A productivity initiatives and realignment of resources (primarily severance and early retirement costs). For information on our U.S. refranchising, see the Refranchising (Gain) Loss section on pages 70 and 71. In connection with our G&A productivity initiatives and realignment of resources (primarily severance and early retirement costs), we recorded pre-tax charges of $5 million, $5 million and $21 million in the years ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively. The unpaid current liability for the severance portion of these charges was $1 million and $5 million as of December 28, 2013 and December 29, 2012, respectively. Severance payments in the years ended December 28, 2013, December 29, 2012 and December 31, 2011 totaled approximately $4 million, $14 million and $4 million respectively. We are not including the impacts of these U.S. business transformation measures in our U.S. segment for performance reporting purposes as we do not believe they are indicative of our ongoing operations. LJS and A&W Divestitures In 2011 we sold the Long John Silver's and A&W All American Food Restaurants brands to key franchise leaders and strategic investors in separate transactions. We recognized $86 million of pre-tax losses and other costs primarily in Closures and impairment (income) expenses during 2011 as a result of these transactions. Additionally, we recognized $104 million of tax benefits related to tax losses associated with the transactions. We are not including the pre-tax losses and other costs in our U.S. and YRI segments for performance reporting purposes as we do not believe they are indicative of our ongoing operations. In 2012, System sales and Franchise and license fees and income in the U.S. were negatively impacted versus 2011 by 5% and 6%, respectively, due to these divestitures while YRI's system sales and Franchise and license fees and income were both negatively impacted by 1%. While these divestitures negatively impacted both the U.S. and YRI segments' Operating Profit by 1% in 2012, the impact on our consolidated Operating Profit was not significant. Refranchising (Gain) Loss The Refranchising (gain) loss by reportable segment is presented below. We do not allocate such gains and losses to our segments for performance reporting purposes.
|  | Refranchising (gain) loss |  |  |  |  |
|  | 2013 |  | 2012 |  | 2011 |  |  |  |  |
China |  | $ | (5 | ) |  | $ | (17 | ) |  | $ | (14 | ) |  |  |  |  |
YRI (a) |  | (4 | ) |  | 61 |  |  | 69 |  |  |  |  |  |
U.S. (b) |  | (91 | ) |  | (122 | ) |  | 17 |  |  |  |  |  |
India |  | — |  |  | — |  |  | — |  |  |  |  |  |
Worldwide |  | $ | (100 | ) |  | $ | (78 | ) |  | $ | 72 |  |  |  |  |  |
(a) | During the fourth quarter of 2012, we refranchised our remaining 331 Company-owned Pizza Hut dine-in restaurants in the United Kingdom ("UK"). The franchise agreement for these stores allows the franchisee to pay continuing franchise fees in the initial years of the agreement at a reduced rate. We agreed to allow the franchisee to pay these reduced fees in part as consideration for their assumption of lease liabilities related to underperforming stores that we anticipate they will close that were part of the refranchising. We recognize the estimated value of terms in franchise agreements entered into concurrently with a refranchising transaction that are not consistent with market terms as part of the upfront refranchising (gain) loss. Accordingly, upon the closing of this refranchising we recognized a loss of $53 million representing the estimated value of these reduced continuing fees. The associated deferred credit is being amortized into YRI's Franchise and license fees and income through 2016. This upfront loss largely contributed to a $70 million Refranchising loss we recognized during 2012 as a result of this refranchising. Also included in that loss was the write-off of $14 million in goodwill allocated to the Pizza Hut UK reporting unit. The remaining carrying value of goodwill allocated to our Pizza Hut UK business of $87 million, immediately subsequent to the aforementioned write-off, was determined not to be impaired as the fair value of the Pizza Hut UK reporting unit exceeded its carrying amount. For the year ended December 28, 2013, the refranchising of the Pizza Hut UK dine-in restaurants decreased Company sales by 18% and increased Franchise and license fees and income and Operating Profit by 2% and 3%, respectively, for the YRI Division versus 2012.
During 2011, we recorded a $76 million charge in Refranchising (gain) loss as a result of our decision to refranchise or close all of our remaining Company-owned Pizza Hut UK dine-in restaurants, primarily to write down these restaurants' long-lived assets to their then estimated fair value. Impairment charges of Pizza Hut UK long-lived assets incurred as a result of this decision, including the charge mentioned in the previous sentence, reduced depreciation expense versus what would have otherwise been recorded by $13 million and $3 million for the years ended December 29, 2012 and December 31, 2011, respectively. These depreciation reductions were not allocated to the YRI segment resulting in depreciation expense in the YRI segment results continuing to be recorded at the rate which it was prior to the impairment charges being recorded for these restaurants.
(b) | U.S. Refranchising (gain) loss in the years ended December 28, 2013 and December 29, 2012 is primarily due to gains on sales of Taco Bell restaurants. U.S. Refranchising (gain) loss in the year ended December 31, 2011 is primarily due to losses on sales of and offers to refranchise KFCs in the U.S. The non-cash impairment charges that were recorded related to our offers to refranchise these Company-owned KFC restaurants in the U.S. decreased depreciation expense versus what would have otherwise been recorded by $3 million and $10 million in the years ended December 29, 2012 and December 31, 2011, respectively. These depreciation reductions were not allocated to the U.S. segment resulting in depreciation expense in the U.S. segment results continuing to be recorded at the rate at which it was prior to the impairment charges being recorded for these restaurants.
See Note 2 for our policy for writing off goodwill in a refranchising transaction. Store Closure and Impairment Activity Store closure (income) costs and Store impairment charges by reportable segment are presented below. These tables exclude $295 million of Little Sheep impairment losses in 2013 and $80 million of net losses related to the LJS and A&W divestitures in 2011, which were not allocated to any segment for performance reporting purposes.
|  | 2013
|  | China |  | YRI |  | U.S. |  | India |  | Worldwide
Store closure (income) costs(a) |  | $ | (1 | ) |  | $ | (4 | ) |  | $ | — |  |  | $ | — |  |  | $ | (5 | )
Store impairment charges |  | 31 |  |  | 3 |  |  | 5 |  |  | 2 |  |  | 41 |
Closure and impairment (income) expenses |  | $ | 30 |  |  | $ | (1 | ) |  | $ | 5 |  |  | $ | 2 |  |  | $ | 36 |
|  | 2012
|  | China |  | YRI |  | U.S. |  | India |  | Worldwide
Store closure (income) costs(a) |  | $ | (4 | ) |  | $ | 12 |  |  | $ | — |  |  | $ | — |  |  | $ | 8 |
Store impairment charges |  | 13 |  |  | 7 |  |  | 9 |  |  | — |  |  | 29 |
Closure and impairment (income) expenses |  | $ | 9 |  |  | $ | 19 |  |  | $ | 9 |  |  | $ | — |  |  | $ | 37 |
|  | 2011
|  | China |  | YRI |  | U.S. |  | India |  | Worldwide
Store closure (income) costs(a) |  | $ | (1 | ) |  | $ | 4 |  |  | $ | 4 |  |  | $ | — |  |  | $ | 7 |
Store impairment charges |  | 13 |  |  | 18 |  |  | 17 |  |  | — |  |  | 48 |
Closure and impairment (income) expenses |  | $ | 12 |  |  | $ | 22 |  |  | $ | 21 |  |  | $ | — |  |  | $ | 55 |
(a) | Store closure (income) costs include the net gain or loss on sales of real estate on which we formerly operated a Company-owned restaurant that was closed, lease reserves established when we cease using a property under an operating lease and subsequent adjustments to those reserves and other facility-related expenses from previously closed stores.
The following table summarizes the 2013 and 2012 activity related to reserves for remaining lease obligations for closed stores.
|  | Beginning Balance |  | Amounts Used |  | New Decisions |  | Estimate/Decision Changes |  | CTA/ Other |  | Ending Balance
2013 Activity |  | $ | 27 |  |  | (11 | ) |  | 1 |  |  | 4 |  |  | — |  |  | $ | 21 |
2012 Activity |  | $ | 34 |  |  | (14 | ) |  | 3 |  |  | 3 |  |  | 1 |  |  | $ | 27 |
Changes in our Effective Tax Rate For 2013 our effective tax rate was 6.4 percentage points higher than 2012. See Note 17 for further discussion of our effective tax rate.

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