Items Affecting Comparability of Net Income and Cash Flows

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
	2015			2014			2015			2014
China	$	(2	)	$	(5	)	$	(4	)	$	(6	)
KFC Division^(a)	35			1			32			—
Pizza Hut Division^(a)	36			(1		)	37			(1		)
Taco Bell Division	(1		)	—			(7		)	(1		)
India	—			1			—			1
Worldwide	$	68		$	(4	)	$	58		$	(7	)

(a)

In 2010 we refranchised our then-remaining Company-operated restaurants in Mexico. To the extent we owned real estate related to these restaurants, we did not sell the real estate, but instead have leased it to the franchisee. During the quarter ended June 13, 2015 we initiated plans to sell this real estate and determined it was held for sale in accordance with GAAP. The sales price we expect to receive for this real estate exceeds its book value. However, the sale of the real estate will represent a substantial liquidation of our Mexican operations under GAAP. Accordingly, we are required to include accumulated translation losses associated with our Mexican business within our held for sale impairment evaluations. As such, we recorded a $68 million non-cash charge to Refranchising Loss, consisting of losses of $36 million and $32 million for our KFC and Pizza Hut Divisions, respectively. This loss represents the excess of the sum of the book value of the real estate and related assets, an insignificant amount of goodwill and our accumulated translation losses over the expected sales price. Our current expectation is that the real estate sale will close late in 2015 with limited, if any, additional pre-tax gain or loss. The sale is ultimately expected to result in a taxable gain as the anticipated proceeds will exceed the tax basis in the real estate, though the related tax expense will not be recognized until the sale closes.

Our KFC and Pizza Hut Divisions earned approximately $3 million and $1 million, respectively, of rental income in 2014 related to this real estate that will transfer to the buyer subsequent to the sale of the real estate. We will continue to earn U.S. dollar denominated franchise fees, most of which are sales-based royalties, under our existing franchise contracts.

KFC U.S. Acceleration Agreement

During the first quarter of 2015, we reached an agreement with our KFC U.S. franchisees that gave us brand marketing control as well as an accelerated path to improved assets and customer experience. In connection with this agreement we anticipate investing approximately $125 million over the next three years primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. We have recorded charges of $8 million and $10 million for the quarter and year to date ended June 13, 2015, respectively, for these investments. We currently expect a total charge of approximately $90 million in 2015 for these investments, with the remaining charge split between 2016 and 2017. These charges are not being allocated to the KFC Division segment operating results.

In addition to the investments above we have agreed to fund incremental system advertising dollars of $60 million. We currently expect to fund approximately $10 million of such advertising in 2015 with the remaining funding split between 2016 and 2017. These amounts are being recorded in the KFC Division segment operating results. During the quarter and year to date ended June 13, 2015, we expensed $3 million in incremental system advertising expense.