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.

During the quarter ended June 11, 2016 we refranchised 93 restaurants, primarily Pizza Hut restaurants in the U.S. We received $89 million in proceeds and recorded $53 million of net refranchising gains related to these transactions. These gains were not allocated to any segment for performance reporting.



	Quarter ended						Year to date
	2016			2015			2016			2015
China	$	(1	)	$	(2	)	$	(4	)	$	(4	)
KFC Division^(a)	2			35			1			32
Pizza Hut Division^(a)	(54		)	36			(56		)	37
Taco Bell Division	—			(1		)	(1		)	(7		)
Worldwide	$	(53	)	$	68		$	(60	)	$	58

(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 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 expected to receive for this real estate exceeded its book value. However, the sale of the real estate represented a substantial liquidation of our Mexican operations under GAAP. Accordingly, we were 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 related to KFC and Pizza Hut, respectively. The loss was not allocated to any segment for performance reporting. 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. We subsequently sold this real estate in 2015.

Additionally, during the quarter ended June 13, 2015, we recognized a charge within Refranchising (gain) loss of $5 million associated with the planned refranchising of our Company-owned Pizza Hut restaurants in Korea.

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 expanded menu offerings, improved assets and enhanced customer experience. In connection with this agreement we anticipate investing approximately $125 million from 2015 through 2017 primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. We recorded pre-tax charges of $8 million for both the quarters ended June 11, 2016 and June 13, 2015 for these investments. We recorded pre-tax charges of $17 million and $10 million for the years to date ended June 11, 2016 and June 13, 2015, respectively, for these investments. These amounts were recorded primarily as Franchise and license expenses. We recorded total pre-tax charges of $72 million during the year ended December 26, 2015 and we currently expect a total pre-tax charge of approximately $30 million in 2016 for these investments. These charges are not being allocated to the KFC Division segment operating results.

In addition to the investments above we agreed to fund $60 million of incremental system advertising from 2015 through 2017. During the quarters ended June 11, 2016 and June 13, 2015, we incurred $5 million and $3 million in incremental system advertising expense, respectively. During the years to date ended June 11, 2016 and June 13, 2015, we incurred $9 million and $3 million in incremental system advertising expense, respectively. We funded approximately $10 million of such advertising during the year ended December 26, 2015. These amounts were recorded primarily in Franchise and license expenses and are included in the KFC Division segment operating results. We currently expect to fund approximately $20 million of such advertising in 2016 and $30 million in 2017.

Costs Associated with the Planned Spin-off of the China Business and YUM Recapitalization

In connection with our planned separation of the YUM China business into an independent, publicly-traded company and the related recapitalization of YUM, we incurred $10 million and $19 million of costs in the quarter and year to date ended June 11, 2016, respectively, which were recorded in General and administrative ("G&A") expenses. Cumulative project costs since the announcement of the planned separation total $28 million and we currently expect to incur additional cash costs of approximately $30 million to complete the spin-off transaction. Additionally, we expect to incur a non-cash charge related to certain share-based awards that will be modified in connection with the spin-off. The amount of the non-cash charge will be based on the intrinsic values of the modified awards at the date of the spin-off. These costs are not being allocated to any of our segment operating results.

See Note 10 for details on YUM's recapitalization.