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Items Affecting Comparability of Net Income and Cash Flows
 8 Months Ended
Sep. 03, 2016
Items Affecting Comparability of Net Income and Cash Flows [Abstract]  
Comparability of Prior Year Financial Data 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 September 3, 2016 we refranchised 123 restaurants, primarily Taco Bell and Pizza Hut restaurants in the U.S. We received $67 million in proceeds and recorded $25 million of net pre-tax refranchising gains related to these transactions. During the year to date ended September 3, 2016 we refranchised 250 restaurants, primarily Pizza Hut and Taco Bell restaurants in the U.S. We received $165 million in proceeds and recorded $85 million of net pre-tax refranchising gains related to these transactions.

 
 
Quarter ended
 
Year to date
 
 
2016
 
2015
 
2016
 
2015
China
 
$
(4
)
 
$
(3
)
 
$
(8
)
 
$
(7
)
KFC Division(a)
 
1

 
4

 
2

 
36

Pizza Hut Division(a)
 
(8
)
 
15

 
(64
)
 
52

Taco Bell Division
 
(14
)
 
(14
)
 
(15
)
 
(21
)
Worldwide
 
$
(25
)
 
$
2

 
$
(85
)
 
$
60



(a)
In 2010 we refranchised our then-remaining Company-operated restaurants in Mexico. To the extent we owned it, we did not sell the real estate related to certain of these restaurants, instead leasing 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. On September 28, 2015, subsequent to our quarter ended September 5, 2015, we sold the real estate for approximately $58 million. While these proceeds exceeded the book value of the real estate, the sale 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 carrying value when performing impairment evaluations subsequent to determining that the real estate was held for sale. We recorded charges of $12 million and $80 million in the quarter and year to date ended September 5, 2015, respectively, representing the excess of the sum of the book value of the real estate and other related assets and our accumulated translation losses over the then-expected sales price. Consistent with the classification of the original market refranchising transaction, these charges were classified as Refranchising (Gain) Loss. Refranchising Losses of $4 million and $40 million were associated with the KFC Division for the quarter and year to date ended September 5, 2015, respectively. Refranchising Losses of $8 million and $40 million were associated with the Pizza Hut Division for the quarter and year to date ended September 5, 2015, respectively. The proceeds ultimately received for the real estate approximated our carrying value including the remaining unrecognized accumulated translation losses as of September 5, 2015.

Additionally, during the quarter and year to date ended September 5, 2015 we recognized charges of $8 million and $13 million, respectively, within Refranchising (Gain) Loss 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 less than $1 million and $21 million for the quarters ended September 3, 2016 and September 5, 2015, respectively, for these investments. We recorded pre-tax charges of $17 million and $31 million for the years to date ended September 3, 2016 and September 5, 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 2018. During the quarters ended September 3, 2016, and September 5, 2015, we incurred $5 million and $3 million in incremental system advertising expense, respectively. During the years to date ended September 3, 2016 and September 5, 2015, we incurred $14 million and $6 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 both 2016 and 2017 and $10 million in 2018.

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 $29 million of pre-tax costs in the quarter and year to date ended September 3, 2016, respectively, which were recorded in General and administrative ("G&A") expenses. Cumulative project costs since the announcement of the planned separation total $38 million and we currently expect to incur additional cash costs of approximately $25 million in the fourth quarter of 2016 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 net increase in fair value of the modified awards that are vested as of the separation date. These costs are not being allocated to any of our segment operating results.

See Notes 10 and 11 for details on YUM's recapitalization.

YUM's Strategic Transformation Initiatives

On October 11, 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 anticipated separation of our China business on October 31, 2016. Major features of the Company’s growth and transformation strategy involve being more focused on the development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure. This transformation will result in YUM being at least 98% refranchised by the end of 2018. During the quarter ended September 3, 2016, YUM offered a Voluntary Retirement Program to certain U.S. employees as a step towards becoming a leaner, more efficient organization. This program will provide separation pay and benefits to employees who elected to voluntarily separate from YUM. We have incurred pre-tax costs of $26 million and $32 million for the quarter and year to date, respectively, related to our Strategic Transformation Initiatives primarily related to this U.S. Voluntary Retirement Program. YUM's Strategic Transformation Initiatives represent the continuation of YUM's transformation of its operating model and capital structure following the China spin-off and recapitalization of YUM. Due to the scope of the initiatives as well as their significance, costs associated with the initiatives are not being allocated to any segment for performance reporting.

Income Tax Benefit related to Little Sheep Investment

See Note 7.