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Items Affecting Comparability of Net Income and Cash Flows | 12 Months Ended
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Dec. 31, 2019
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 Refranchising (Gain) Loss The Refranchising (gain) loss by our Divisional reportable segments is presented below. Given the size and volatility of refranchising initiatives, our chief operating decision maker ("CODM") does not consider the impact of Refranchising (gain) loss when assessing Divisional segment performance. As such, we do not allocate such gains and losses to our Divisional segments for performance reporting purposes. During the years ended December 31, 2019, 2018 and 2017, we refranchised 25, 660 and 1,470 restaurants, respectively. Additionally, during the year ended December 31, 2019, we sold certain restaurant assets associated with existing franchise restaurants to the franchisee. We received $110 million, $825 million and $1,773 million in pre-tax refranchising proceeds in 2019, 2018 and 2017, respectively. A summary of Refranchising (gain) loss is as follows:
|  | Refranchising (gain) loss |  |  |  |  |
|  | 2019 |  | 2018 |  | 2017 |  |  |  |  |
KFC Division |  | $ | (6 | ) |  | $ | (240 | ) |  | $ | (581 | ) |  |  |  |  |
Pizza Hut Division |  | — |  |  | 13 |  |  | (16 | ) |  |  |  |  |
Taco Bell Division |  | (31 | ) |  | (313 | ) |  | (486 | ) |  |  |  |  |
Worldwide |  | $ | (37 | ) |  | $ | (540 | ) |  | $ | (1,083 | ) |  |  |  |  |
As a result of classifying restaurant and related assets as held for sale and ceasing depreciation expense, depreciation expense was reduced versus what would have otherwise been recorded by less than $1 million, $3 million and $10 million during the years ended December 31, 2019, 2018 and 2017, respectively. Our CODM does not consider the impact of these depreciation reductions, which were recorded within Company restaurant expenses, when assessing Divisional segment performance. These depreciation reductions were recorded as an unallocated benefit and were not allocated to the Division segments resulting in depreciation expense continuing to be recorded within our Divisional results at the rate at which it was prior to the held for sale classification. Pizza Hut U.S. Transformation Agreement In May 2017, we reached an agreement with Pizza Hut U.S. franchisees that will improve brand marketing alignment, accelerate enhancements in operations and technology and that included a permanent commitment to incremental advertising as well as digital and technology contributions by franchisees (the “Transformation Agreement”). In connection with the Transformation Agreement we anticipate investing approximately $90 million from 2017 to 2020 to upgrade restaurant equipment to improve operations, fund improvements in restaurant technology and enhance digital and e-commerce capabilities. As of December 31, 2019, we have invested $89 million since the inception of the agreement. We have invested $25 million, $25 million and $39 million for the years ended December 31, 2019, 2018 and 2017, respectively, related to the Transformation Agreement. These amounts consisted of capital investments and franchisee incentive payments that were capitalized. Also included are operating investments of $13 million, $6 million and $31 million in the years ended December 31, 2019, 2018 and 2017, respectively. Due to their unique and long-term brand-building nature as well as their non-recurring impact on Pizza Hut’s Division results, the financial impact of operating investments that are part of the Transformation Agreement are not being considered by our CODM when assessing segment performance. As such, these operating investments are not being allocated to the Pizza Hut Division operating segment results for performance reporting purposes. Depreciation on capital investments made as part of the Transformation Agreement is being allocated to Pizza Hut segment results as the expense is recurring and is not expected to significantly impact the comparability of results in any given period. For the same reasons, the amortization related to capitalized franchisee incentive payments is being allocated to Pizza Hut Division operating segment results. In addition to the investments above, we funded $37.5 million of incremental system advertising from the second half of 2017 through 2018, including $12.5 million and $25 million we incurred during the years ended December 31, 2018 and 2017, respectively. These advertising amounts were recorded primarily in Franchise and property expenses and were included in the Pizza Hut Division segment operating results. KFC U.S. Acceleration Agreement During 2015, we reached an agreement with our KFC U.S. franchisees that gave us control of brand marketing execution as well as an accelerated path to expanded menu offerings, improved assets and enhanced customer experience. In connection with this agreement we invested approximately $130 million from 2015 through 2019. These investments, which primarily related to new back-of-house equipment for franchisees and incentives to accelerate franchisee store remodels, totaled $6 million, $6 million and $17 million in the years ended December 31, 2019, 2018 and 2017, respectively. To the extent these investments were not capitalized ($2 million in 2018 and $17 million in 2017) the financial impacts of the investments were not considered by our CODM when assessing segment performance. As such, these investments are not being allocated to the KFC Division operating segment results for performance reporting purposes. As of December 31, 2019 the initiatives related to this program are substantially complete. In addition to the investments above, we funded $60 million of incremental system advertising from 2015 through 2018, including $10 million and $20 million incurred during the years ended December 31, 2018 and 2017, respectively. These advertising amounts were recorded primarily in Franchise and property expenses and were included in the KFC Division segment operating results. Turkey Acquisition Contingent Consideration During the second quarter of 2019 we recorded charges of $8 million and $2 million to Other (income) expense and Interest expense, net, respectively, related to cash payments in excess of our recorded liability to settle contingent consideration associated with our 2013 acquisition of the KFC Turkey and Pizza Hut Turkey businesses. Consistent with prior adjustments to the recorded contingent consideration, our CODM does not consider this charge when assessing segment performance due to the nature of these costs. As such, these costs were not allocated to any of our segment operating results for performance reporting purposes. Investment in Grubhub, Inc. ("Grubhub") On February 7, 2018, certain of our subsidiaries entered into a master services agreement with a subsidiary of Grubhub, an online and mobile takeout food-ordering company in the U.S., which is intended to provide dedicated support for the KFC and Taco Bell branded online delivery channels in the U.S. through Grubhub’s online ordering platform, logistics and last-mile support for delivery orders, as well as point-of-sale integration to streamline operations. Concurrently with the master services agreement, one of our subsidiaries entered into an investment agreement with Grubhub to invest $200 million in exchange for approximately 2.8 million shares of Grubhub common stock, subject to customary closing conditions. In April 2018, all necessary regulatory approvals were obtained and the purchase of Grubhub shares was consummated. Shares acquired as part of this purchase are restricted from being transferred until the earlier of the two-year anniversary of closing the investment agreement or 30 days following the termination of our master services agreement with Grubhub. In the years ended December 31, 2019 and 2018 we recognized pre-tax expense of $77 million and pre-tax income of $14 million, respectively, related to the mark-to-market of these shares, which includes the respective depreciation and appreciation in the market price of Grubhub common stock. Changes in the fair value of our investment in Grubhub common stock are presented as Investment (income) expense, net within our Consolidated Statements of Income. Income Tax Matters During the year ended December 31, 2019 we completed intercompany transfers of certain intellectual property rights. As a result of the transfer of certain of these rights, largely to subsidiaries in the United Kingdom, we received a step-up in tax basis to current fair value under applicable tax law. To the extent this step-up in basis will be amortizable against future taxable income, we recognized a one-time deferred tax benefit of $226 million in the year ended December 31, 2019. We recognized $434 million in our Income tax provision for the year ended December 31, 2017 as a result of the December 22, 2017 enactment of the Tax Cuts and Jobs Act of 2017 ("Tax Act"). During the year ended December 31, 2018, we recorded a $35 million decrease related to our provisional tax expense recorded in the fourth quarter of 2017 associated with the Tax Act. See Note 17. YUM's Strategic Transformation Initiatives In October 2016, we announced our strategic transformation plans to drive global expansion of the KFC, Pizza Hut and Taco Bell brands ("YUM's Strategic Transformation Initiatives") following the then anticipated spin-off of our China business (the "Separation") on October 31, 2016 into an independent, publicly-traded company under the name of Yum China Holdings, Inc. ("Yum China"). Major features of the Company’s strategic transformation plans involved being more focused on the development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure. We incurred pre-tax costs of $8 million and $23 million related to our Strategic Transformation Initiatives in 2018 and 2017, respectively, primarily recorded in G&A. In 2018 and 2017, these costs included contract termination costs and relocation and severance costs for restaurant-support center employees. Due to the scope of the initiatives as well as their significance, our CODM did not consider the associated cost when assessing segment performance. As such, these costs were not allocated to any of our segment operating results for performance reporting purposes. Modifications of Share-based Compensation Awards In connection with the Separation, we modified certain share-based compensation awards held as part of our Executive Income Deferral ("EID") Plan in phantom shares of YUM Common Stock to provide one phantom Yum China share-based award for each outstanding phantom YUM share-based award. Through October 31, 2018, these Yum China awards could be settled in cash, as opposed to stock, which required recognition of the fair value of these awards within G&A in our Consolidated Income Statement. During 2018 and 2017, we recorded pre-tax credits of $3 million and charges of $18 million, respectively, related to these awards due to changes in the market price of Yum China's common stock. Given these adjustments were a direct result of the separation of our China business, our CODM did not consider their impact when assessing segment performance. As such, these amounts were not allocated to any of our segment operating results. Beginning October 31, 2018, deferrals in phantom shares of Yum China common stock were no longer an investment option within our EID Plan and any balances relating to these phantom shares were moved to another available EID Plan investment option as selected by the participants. Amounts directed into cash or phantom shares of a Stock Index Fund or a Bond Index Fund remained classified as a liability and any appreciation or depreciation in these investments from the transfer date forward is being recognized as compensation expense and included in our segment operating results consistent with existing investments in these funds. Any balances directed into phantom shares of YUM Common Stock were reclassified to Common Stock on our Consolidated Balance Sheet. We do not recognize compensation expense for the appreciation or depreciation, if any, of investments in phantom shares of our Common Stock. See Note 15 for further description of our EID Plan. Impact of Adopting New Lease Standards As discussed in Note 2, we adopted Topic 842 at the beginning of the year ended December 31, 2019, using a modified retrospective method. Topic 842 was applied to all leases existing at, or entered into after, the beginning of 2019. As a result of adopting Topic 842, the following adjustments were made to the Consolidated Balance Sheet as of the beginning of the year ended December 31, 2019:
CONSOLIDATED BALANCE SHEET
| As Reported 12/31/2018 |  | Adjustments |  | Balances with Adoption of Topic 842 1/1/2019
ASSETS |  |  |  |  |
Current Assets |  |  |  |  |
Cash and cash equivalents | $ | 292 |  |  | $ | — |  |  | $ | 292 |
Accounts and notes receivable, net | 561 |  |  | — |  |  | 561 |
Prepaid expenses and other current assets | 354 |  |  | (10 | ) |  | 344 |
Total Current Assets | 1,207 |  |  | (10 | ) |  | 1,197 |
Property, plant and equipment, net | 1,237 |  |  | — |  |  | 1,237 |
Goodwill | 525 |  |  | — |  |  | 525 |
Intangible assets, net | 242 |  |  | — |  |  | 242 |
Other assets | 724 |  |  | 689 |  |  | 1,413 |
Deferred income taxes | 195 |  |  | — |  |  | 195 |
Total Assets | $ | 4,130 |  |  | $ | 679 |  |  | $ | 4,809 |
LIABILITIES AND SHAREHOLDERS’ DEFICIT |  |  |  |  |
Current Liabilities |  |  |  |  |
Accounts payable and other current liabilities | $ | 911 |  |  | $ | 76 |  |  | $ | 987 |
Income taxes payable | 69 |  |  | — |  |  | 69 |
Short-term borrowings | 321 |  |  | — |  |  | 321 |
Total Current Liabilities | 1,301 |  |  | 76 |  |  | 1,377 |
Long-term debt | 9,751 |  |  | — |  |  | 9,751 |
Other liabilities and deferred credits | 1,004 |  |  | 605 |  |  | 1,609 |
Total Liabilities | 12,056 |  |  | 681 |  |  | 12,737 |
Shareholders’ Deficit |  |  |  |  |
Accumulated deficit | (7,592 | ) |  | (2 | ) |  | (7,594 | )
Accumulated other comprehensive loss | (334 | ) |  | — |  |  | (334 | )
Total Shareholders’ Deficit | (7,926 | ) |  | (2 | ) |  | (7,928 | )
Total Liabilities and Shareholders’ Deficit | $ | 4,130 |  |  | $ | 679 |  |  | $ | 4,809 |
We recorded lease liabilities within Accounts payable and other current liabilities and Other liabilities and deferred credits of $83 million and $661 million, respectively, related to the present value of the remaining operating lease payments. These adjustments were partially offset by reductions to Accounts payable and other current liabilities and Other liabilities and deferred credits of $7 million and $56 million, respectively, primarily related to the write offs of liabilities previously recorded to reflect the impact of recognizing rent expense on a straight-line basis when lease payments were escalating under Legacy Lease GAAP. Additionally, lease liabilities recognized upon adoption were offset by the write-off of prepaid rent of $11 million that was recorded under Legacy Lease GAAP resulting in a decrease within Prepaid expenses and other current assets and Other assets of $10 million and $1 million, respectively. We recorded a corresponding right-of-use asset within Other Assets of $690 million. This right-of-use asset reflected a $2 million impairment charge that would have been recorded before adoption of Topic 842 had the right-of-use asset been recognized under Legacy Lease GAAP. A related increase was recorded in Accumulated deficit. Impact of Adopting New Revenue Recognition Standards As discussed in Note 2, we adopted Topic 606 at the beginning of the year ended December 31, 2018, using the modified retrospective method. Topic 606 was applied to all contracts with customers as of January 1, 2018 and the cumulative effective of this transition was recorded as an adjustment to Accumulated deficit as of this date. As a result, the following adjustments were made to the Consolidated Balance Sheet as of January 1, 2018:
CONSOLIDATED BALANCE SHEET |  |  |  |  |  |
| As Reported 12/31/2017 |  | Adjustments |  |  | Balances with Adoption of Topic 606 1/1/2018
ASSETS |  |  |  |  |  |
Current Assets |  |  |  |  |  |
Cash and cash equivalents | $ | 1,522 |  |  | $ | 11 |  |  |  | $ | 1,533 |
Accounts and notes receivable, net | 400 |  |  | 112 |  |  |  | 512 |
Prepaid expenses and other current assets | 384 |  |  | 76 |  | (a) |  | 460 |
Advertising cooperative assets, restricted | 201 |  |  | (201 | ) |  |  | — |
Total Current Assets | 2,507 |  |  | (2 | ) |  |  | 2,505 |
Property, plant and equipment, net | 1,594 |  |  | 2 |  |  |  | 1,596 |
Goodwill | 512 |  |  | — |  |  |  | 512 |
Intangible assets, net | 214 |  |  | 9 |  |  |  | 223 |
Other assets | 345 |  |  | 118 |  |  |  | 463 |
Deferred income taxes | 139 |  |  | 26 |  |  |  | 165 |
Total Assets | $ | 5,311 |  |  | $ | 153 |  |  |  | $ | 5,464 |
LIABILITIES AND SHAREHOLDERS’ DEFICIT |  |  |  |  |  |
Current Liabilities |  |  |  |  |  |
Accounts payable and other current liabilities | $ | 813 |  |  | $ | 220 |  |  |  | $ | 1,033 |
Income taxes payable | 123 |  |  | — |  |  |  | 123 |
Short-term borrowings | 375 |  |  | — |  |  |  | 375 |
Advertising cooperative liabilities | 201 |  |  | (201 | ) |  |  | — |
Total Current Liabilities | 1,512 |  |  | 19 |  |  |  | 1,531 |
Long-term debt | 9,429 |  |  | — |  |  |  | 9,429 |
Other liabilities and deferred credits | 704 |  |  | 353 |  |  |  | 1,057 |
Total Liabilities | 11,645 |  |  | 372 |  |  |  | 12,017 |
Shareholders’ Deficit |  |  |  |  |  |
Accumulated deficit | (6,063 | ) |  | (240 | ) |  |  | (6,303 | )
Accumulated other comprehensive loss | (271 | ) |  | 21 |  |  |  | (250 | )
Total Shareholders’ Deficit | (6,334 | ) |  | (219 | ) |  |  | (6,553 | )
Total Liabilities and Shareholders’ Deficit | $ | 5,311 |  |  | $ | 153 |  |  |  | $ | 5,464 |
(a) | Includes $58 million of restricted cash related to advertising cooperatives. These balances can only be used to settle obligations of the respective cooperatives.
We recorded an increase in Accounts payable and other current liabilities and Other liabilities and deferred credits of $57 million and $335 million, respectively, as part of our cumulative adjustment related to unamortized upfront franchise fees, with a corresponding $392 million increase in Accumulated deficit. We recorded increases in Prepaid expenses and other current assets and Other assets of $18 million and $118 million, respectively, as part of our cumulative adjustment related to unamortized franchise incentives, with a corresponding $136 million decrease in Accumulated deficit. Deferred income taxes increased $26 million as a result of recording the tax effects of the two adjustments noted above, with a corresponding decrease to Accumulated deficit. Accumulated other comprehensive loss decreased $21 million as a result of recognizing the impact of foreign currency translation related to the three adjustments noted above, with a corresponding increase in Accumulated deficit. The remaining adjustments to our December 31, 2017 Consolidated Balance Sheet are primarily a result of reclassifying the assets and liabilities of our consolidated advertising cooperative from Advertising cooperative assets, restricted and Advertising cooperative liabilities to the respective balance sheet caption to which the assets and liabilities relate. The following tables reflect the impact of the adoption of Topic 606 on our Consolidated Statement of Income for the year ended December 31, 2018 and our Consolidated Balance Sheet as of December 31, 2018.
CONSOLIDATED STATEMENT OF INCOME |  |  |  |  |  |
| Year ended 12/31/2018
Revenues | As Reported |  | Impact |  |  | Balances under Legacy Revenue GAAP
Company sales | $ | 2,000 |  |  | $ | — |  |  |  | $ | 2,000 |
Franchise and property revenues | 2,482 |  |  | 43 |  |  |  | 2,525 |
Franchise contributions for advertising and other services | 1,206 |  |  | (1,206 | ) |  |  | — |
Total revenues | 5,688 |  |  | (1,163 | ) |  |  | 4,525 |
Costs and Expenses, Net |  |  |  |  |  |
Company restaurant expenses | 1,634 |  |  | — |  |  |  | 1,634 |
General and administrative expenses | 895 |  |  | — |  |  |  | 895 |
Franchise and property expenses | 188 |  |  | 27 |  |  |  | 215 |
Franchise advertising and other services expense | 1,208 |  |  | (1,208 | ) |  |  | — |
Refranchising (gain) loss | (540 | ) |  | 4 |  |  |  | (536 | )
Other (income) expense | 7 |  |  | — |  |  |  | 7 |
Total costs and expenses, net | 3,392 |  |  | (1,177 | ) |  |  | 2,215 |
Operating Profit | 2,296 |  |  | 14 |  | (a) |  | 2,310 |
Investment (income) expense, net | (9 | ) |  | — |  |  |  | (9 | )
Other pension (income) expense | 14 |  |  | — |  |  |  | 14 |
Interest expense, net | 452 |  |  | — |  |  |  | 452 |
Income before income taxes | 1,839 |  |  | 14 |  |  |  | 1,853 |
Income tax provision (benefit) | 297 |  |  | 3 |  |  |  | 300 |
Net Income | $ | 1,542 |  |  | $ | 11 |  |  |  | $ | 1,553 |
Basic Earnings Per Common Share | $ | 4.80 |  |  | $ | 0.03 |  |  |  | $ | 4.83 |
Diluted Earnings Per Common Share | $ | 4.69 |  |  | $ | 0.03 |  |  |  | $ | 4.72 |
(a) | Includes $23 million of franchise incentive payments made to or on behalf of franchisees during 2018 that under Legacy Revenue GAAP would have been recognized as expense in full in 2018. Due to the size and nature of such payments, we historically would not have allocated their impact to our Divisional results. Upon the adoption of Topic 606, these payments have been capitalized as assets.
Upon the adoption of Topic 606, the timing and amount of revenue recognized for upfront franchise fees and franchise incentives changed from upfront recognition under Legacy Revenue GAAP to recognition over the term of the franchise agreement to which the fees and incentives relate. Also, under Legacy Revenue GAAP, amounts reported as Franchise contributions for advertising and other services and Franchise advertising and other services expense were presented on a net basis. Upon the adoption of Topic 606, these amounts require gross presentation in our Consolidated Statements of Income. Lastly, Legacy Revenue GAAP required that certain value-added taxes withheld and remitted on our behalf by our franchisees be reported as revenue and corresponding expense in our Consolidated Statements of Income. Upon adoption of Topic 606, these taxes are reported on a net basis as a reduction in Franchise and property revenues.
CONSOLIDATED BALANCE SHEET
| As Reported 12/31/2018 |  | Impact |  | Balances under Legacy Revenue GAAP 12/31/2018
ASSETS |  |  |  |  |
Current Assets |  |  |  |  |
Cash and cash equivalents | $ | 292 |  |  | $ | (13 | ) |  | $ | 279 |
Accounts and notes receivable, net | 561 |  |  | (120 | ) |  | 441 |
Prepaid expenses and other current assets | 354 |  |  | (107 | ) |  | 247 |
Advertising cooperative assets, restricted | — |  |  | 241 |  |  | 241 |
Total Current Assets | 1,207 |  |  | 1 |  |  | 1,208 |
Property, plant and equipment, net | 1,237 |  |  | (2 | ) |  | 1,235 |
Goodwill | 525 |  |  | — |  |  | 525 |
Intangible assets, net | 242 |  |  | (16 | ) |  | 226 |
Other assets | 724 |  |  | (127 | ) |  | 597 |
Deferred income taxes | 195 |  |  | (25 | ) |  | 170 |
Total Assets | $ | 4,130 |  |  | $ | (169 | ) |  | $ | 3,961 |
LIABILITIES AND SHAREHOLDERS’ DEFICIT |  |  |  |  |
Current Liabilities |  |  |  |  |
Accounts payable and other current liabilities | $ | 911 |  |  | $ | (287 | ) |  | $ | 624 |
Income taxes payable | 69 |  |  | — |  |  | 69 |
Short-term borrowings | 321 |  |  | — |  |  | 321 |
Advertising cooperative liabilities | — |  |  | 241 |  |  | 241 |
Total Current Liabilities | 1,301 |  |  | (46 | ) |  | 1,255 |
Long-term debt | 9,751 |  |  | — |  |  | 9,751 |
Other liabilities and deferred credits | 1,004 |  |  | (354 | ) |  | 650 |
Total Liabilities | 12,056 |  |  | (400 | ) |  | 11,656 |
Shareholders’ Deficit |  |  |  |  |
Accumulated deficit | (7,592 | ) |  | 251 |  |  | (7,341 | )
Accumulated other comprehensive loss | (334 | ) |  | (20 | ) |  | (354 | )
Total Shareholders’ Deficit | (7,926 | ) |  | 231 |  |  | (7,695 | )
Total Liabilities and Shareholders’ Deficit | $ | 4,130 |  |  | $ | (169 | ) |  | $ | 3,961 |
The significant impacts resulting from the adoption of Topic 606 on our Consolidated Balance Sheet as of December 31, 2018, are consistent with those recorded as of January 1, 2018 as described previously. Under Legacy Revenue GAAP, Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents pertaining to advertising cooperatives that we were required to consolidate were classified within Advertising cooperative assets, restricted. Upon adoption of Topic 606, these amounts are reflected on our Consolidated Balance Sheet and changes in these balances are reported within our Consolidated Statement of Cash Flows. Items Impacting Other Pension (Income) Expense During the first quarter of 2017, as a result of the completion of a pension data review and reconciliation, we recorded a non-cash, out-of-year charge of $22 million to Other pension (income) expense to adjust our historical U.S. pension liability related to our deferred vested participants. Our CODM did not consider the impact of this charge when assessing segment performance given the number of years over which it accumulated. As such, this cost was not allocated to any of our segment operating results for performance reporting purposes. See Note 14 for further discussion of our pension plans.

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