Items Affecting Comparability of Net Income and/or Cash Flows

Little Sheep Acquisition and 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 Condensed Consolidated Statement of Income during the quarter ended March 24, 2012 and was not allocated to any segment for performance reporting purposes.

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. As a result of consolidating Little Sheep, the primary assets recorded were an indefinite-lived Little Sheep trademark and goodwill of approximately $400 million and $375 million, respectively. The goodwill was assigned to the newly formed Little Sheep reporting unit within our China Division.

The same-store sales growth and new unit development that we assumed upon acquisition have yet to materialize. Sales growth was negatively impacted initially 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 from quality issues with other unrelated hot pot concepts in China, even though there was not an issue with the quality of Little Sheep products. During the third quarter we saw limited recovery in the Little Sheep business, and sales and profits continued to be below our expectations.

While we remain confident in the long-term potential of Little Sheep, these sustained declines in sales and profits, 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 in 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. 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 Condensed 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 and 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 sales growth, margin improvement and new unit development assumptions that are highly correlated as cash flow growth can be achieved through various inter-related strategies such as product pricing, restaurant productivity initiatives and the timing of new unit development. 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.

While future business results are difficult to predict, we believe the recent decline in Little Sheep sales and profits will be reversed over time. As such, the inputs used in determining the fair values of the Little Sheep trademark and reporting unit assume that the business will recover to pre-acquisition sales and profit levels over the next three years. Long-term average growth assumptions subsequent to this assumed recovery include same-store-sales growth of 4% and average annual net unit development of approximately 75 units.

Turkey Restaurant Acquisition

In April 2013, we acquired 65 KFC and 41 Pizza Hut restaurants from an existing franchisee in Turkey for $86 million of cash and a potential payment of up to $19 million to be made in 2016 based on results of the business through 2015.

We recognized $85 million of goodwill for the value expected to be generated from the acquisition, primarily through net unit development. The goodwill is not expected to be deductible for income tax purposes and has been allocated to the YRI operating segment.

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.



	Quarter ended						Year to date
	9/7/2013			9/8/2012			9/7/2013			9/8/2012
China	$	(1	)	$	(3	)	$	(2	)	$	(7	)
YRI^(a)	—			—			(3		)	19
U.S.^(b)	(37		)	1			(82		)	(53		)
India	—			—			—			—
Worldwide	$	(38	)	$	(2	)	$	(87	)	$	(41	)


(a)	During the fourth quarter of 2012, we refranchised our remaining 331 Company-owned Pizza Hut dine-in restaurants in the United Kingdom ("UK"). For the year to date ended September 8, 2012 we recorded pre-tax losses of $24 million due to the then planned refranchising of these restaurants.


(b)	In the quarter ended September 7, 2013 and in the years to date ended September 7, 2013 and September 8, 2012, U.S. Refranchising (gain) loss primarily relates to gains on the sales of Taco Bell restaurants.

Store Closure and Impairment Activity

Store closure (income) costs and Store impairment charges by reportable segment are presented below.



	Quarter ended September 7, 2013
	China		YRI			U.S.			India		Worldwide
Store closure (income) costs^(a)	$	1	$	(1	)	$	(1	)	$	—	$	(1	)
Store impairment charges	5		1			—			—		6
Closure and impairment (income) expenses^(b)	$	6	$	—		$	(1	)	$	—	$	5



	Quarter ended September 8, 2012
	China			YRI		U.S.		India		Worldwide
Store closure (income) costs^(a)	$	(1	)	$	1	$	—	$	—	$	—
Store impairment charges	2			1		1		—		4
Closure and impairment (income) expenses	$	1		$	2	$	1	$	—	$	4



	Year to date ended September 7, 2013
	China			YRI			U.S.			India		Worldwide
Store closure (income) costs^(a)	$	(2	)	$	(1	)	$	(1	)	$	—	$	(4	)
Store impairment charges	16			1			1			1		19
Closure and impairment (income) expenses^(b)	$	14		$	—		$	—		$	1	$	15



	Year to date ended September 8, 2012
	China			YRI			U.S.			India		Worldwide
Store closure (income) costs^(a)	$	(3	)	$	(1	)	$	(2	)	$	—	$	(6	)
Store impairment charges	7			3			5			—		15
Closure and impairment (income) expenses	$	4		$	2		$	3		$	—	$	9


(a)	Store closure (income) costs include the net gain or loss on sales of real estate on which we formerly operated a Company 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.


(b)	This table excludes $295 million of Little Sheep impairment losses that were not allocated to any segment for performance reporting purposes. See the Little Sheep Acquisition and Impairment section of Note 4 for details.