The Refranchising (gain) loss by reportable segment 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 segment performance. As such, we do not allocate such gains and losses to our segments for performance reporting purposes.

During the quarter and year to date ended June 30, 2018, we refranchised 51 restaurants and 195 restaurants, respectively, and received $47 million and $252 million, respectively, in pre-tax proceeds. During the quarter and year to date ended June 30, 2017, we refranchised 244 restaurants and 365 restaurants, respectively, and received $136 million and $321 million, respectively, in pre-tax proceeds.

During 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 are investing approximately $130 million from 2015 through 2019 primarily to fund new back-of-house equipment for franchisees and to provide incentives to accelerate franchisee store remodels. Under Legacy GAAP these amounts were expensed as incurred including $5 million and $8 million during the quarter and year to date ended June 30, 2017, respectively. We recorded total pre-tax charges of $115 million, primarily as Franchise and property expenses, during the three year period ended December 31, 2017. Due to their size and unique and long-term brand building nature, as well as their non-recurring impact on KFC Division's results when expensed upfront, our CODM did not consider the impact of these investments when assessing segment performance from 2015 through 2017. As such, prior to 2018 the investments were not allocated to the KFC Division segment operating results for performance reporting purposes.

Upon adoption of Topic 606 in 2018, approximately $100 million of these incentives paid to franchisees from 2015 through 2017 were capitalized, net of amortization of $19 million. These capitalized amounts are being amortized as a reduction to Franchise and property revenues over the period of expected cash flows from the franchise agreements to which the payment relates. Amortization related to both franchise incentive payments that were capitalized upon the adoption of Topic 606 and franchise incentive payments that will be capitalized going forward will be allocated to KFC segment operating results as the expense is recurring and is not expected to significantly impact the comparability of results in any given period. During the quarter and year to date ended June 30, 2018, we recorded a reduction to KFC Division Franchise and property revenues related to the amortization of these franchise incentive payments of $3 million and $5 million, respectively.

In addition to the investments above, we agreed to fund $60 million of incremental system advertising from 2015 through 2018. During the quarters ended June 30, 2018 and 2017, we incurred $3 million and $5 million, respectively, in incremental system advertising expense. During the years to date ended June 30, 2018 and 2017, we incurred $5 million and $9 million, respectively, in incremental system advertising expense. We funded approximately $50 million of such advertising during the three year period ended December 31, 2017, which included $20 million during 2017. We currently expect to fund approximately $10 million in 2018. All of these advertising amounts were recorded primarily in Franchise and property expenses and have been and will continue to be included in the KFC Division segment operating results.

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 separation of our China business on October 31, 2016. Major features of the Company’s strategic transformation plans involve being more focused on the development of our three brands, increasing our franchise ownership and creating a leaner, more efficient cost structure. During the quarters ended June 30, 2018 and 2017, we recognized pre-tax charges of less than $1 million and $4 million, respectively, primarily within G&A, related to these initiatives. During the years to date ended June 30, 2018 and 2017, we recognized pre-tax charges of $1 million and $11 million, respectively, primarily within G&A. These costs primarily related to severance and relocation costs. Due to the scope of the initiatives as well as their significance, our CODM does not consider the impact of these initiatives when assessing

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 includes 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 to upgrade restaurant equipment to improve operations, fund improvements in restaurant technology and enhance digital and ecommerce capabilities. We currently expect the majority of this investment, which will be a mix of both capital and operating investments, to be split between 2017 and 2018.

We invested $39 million related to the Transformation Agreement in 2017, which included $8 million of investments that we capitalized and $31 million that was expensed primarily as Franchise and property expenses or G&A. The $31 million expense amount included $5 million of franchisee incentive payments that under Legacy GAAP were expensed as incurred. Due to the adoption of Topic 606 in 2018, franchise incentive payments related to the Transformation Agreement are now being capitalized, including the $5 million from 2017 that was capitalized as part of the Topic 606 transition adjustment recorded as of January 1, 2018. These capitalized amounts are being amortized as a reduction to Franchise and property revenues over the period of expected cash flows from the franchise agreements to which the payment relates.

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 considered by our CODM when assessing segment performance. As a result, these operating investments are not being allocated to the Pizza Hut Division operating segment results for performance reporting purposes. Depreciation on capital investments 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 franchise incentive payments that were capitalized upon the adoption of Topic 606 and amortization related to franchise incentive payments that will be capitalized going forward will be allocated to Pizza Hut segment operating results.

In addition to the investments above, we agreed to fund $37.5 million of incremental system advertising dollars from the second half of 2017 through 2018. During the quarter and year to date ended June 30, 2018, we incurred $2 million and $5 million, respectively, in related incremental system advertising expense. We funded approximately $25 million of such advertising during 2017, which was expensed in the third and fourth quarters of 2017. We currently expect to fund approximately $12.5 million in 2018. These advertising amounts have been and will continue to be recorded primarily in Franchise and property expenses and are included in Pizza Hut's segment operating results.

In connection with the separation of our business in China, 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. These Yum China awards may now be settled in cash, as opposed to stock, which requires recognition of the fair value of these awards within G&A in our Condensed Consolidated Income Statement. During the quarter and year to date ended June 30, 2018 we recorded pre-tax credits related to these awards of $2 million and $1 million, respectively, due to depreciation in the market price of Yum China's stock. During the quarter and year to date ended June 30, 2017, we recorded pre-tax charges related to these awards of $16 million and $18 million, respectively. Given these adjustments were a direct result of the separation, our CODM does not consider their impact when assessing segment performance. As such, these amounts are not being allocated to any of our segment operating results.

As discussed in Note 1, we adopted Topic 606 beginning with the quarter ended March 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 Condensed Consolidated Balance Sheet as of January 1, 2018:



CONDENSED 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	1,697			11				1,708
Goodwill	512			—				512
Intangible assets, net	110			—				110
Other assets	346			118				464
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

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 Condensed Consolidated Balance Sheet are primarily a result of reclassifying the assets and liabilities of our consolidated advertising cooperates from Advertising cooperative assets, restricted and Advertising cooperative liabilities to the respective balance sheet caption to which the assets and liabilities relate.



CONDENSED CONSOLIDATED STATEMENTS OF INCOME
	Quarter ended 6/30/2018
Revenues	As Reported			Impact				Balances under Legacy GAAP
Company sales	$	512		$	—			$	512
Franchise and property revenues	584			7				591
Franchise contributions for advertising and other services	272			(272		)		—
Total revenues	1,368			(265		)		1,103
Costs and Expenses, Net
Company restaurant expenses	421			—				421
General and administrative expenses	208			—				208
Franchise and property expenses	40			5				45
Franchise advertising and other services expense	274			(274		)		—
Refranchising (gain) loss	(29		)	4				(25		)
Other (income) expense	5			—				5
Total costs and expenses, net	919			(265		)		654
Operating Profit	449			—			^(a)	449
Investment (income) expense, net	(23		)	—				(23		)
Other pension (income) expense	3			—				3
Interest expense, net	112			—				112
Income before income taxes	357			—				357
Income tax provision	36			—				36
Net Income	$	321		$	—			$	321

Basic Earnings Per Common Share	$	0.99		$	—			$	0.99

Diluted Earnings Per Common Share	$	0.97		$	—			$	0.97



	Year to date ended 6/30/2018
Revenues	As Reported			Impact				Balances under Legacy GAAP
Company sales	$	1,024		$	—			$	1,024
Franchise and property revenues	1,168			12				1,180
Franchise contributions for advertising and other services	547			(547		)		—
Total revenues	2,739			(535		)		2,204
Costs and Expenses, Net
Company restaurant expenses	859			—				859
General and administrative expenses	427			—				427
Franchise and property expenses	87			11				98
Franchise advertising and other services expense	546			(546		)		—
Refranchising (gain) loss	(185		)	4				(181		)
Other (income) expense	3			—				3
Total costs and expenses, net	1,737			(531		)		1,206
Operating Profit	1,002			(4		)	^(a)	998
Investment (income) expense, net	(89		)	—				(89		)
Other pension (income) expense	6			—				6
Interest expense, net	219			—				219
Income before income taxes	866			(4		)		862
Income tax provision	112			(1		)		111
Net Income	$	754		$	(3	)		$	751

Basic Earnings Per Common Share	$	2.30		$	(0.01	)		$	2.29

Diluted Earnings Per Common Share	$	2.25		$	(0.01	)		$	2.24

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 GAAP to recognition over the term of the franchise agreement to which the fees and incentives relate. Also, under Legacy 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 Condensed Consolidated Statements of Income. Lastly, Legacy 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 Condensed 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.



CONDENSED CONSOLIDATED BALANCE SHEET
	As Reported 6/30/2018			Impact			Balances under Legacy GAAP 6/30/2018
ASSETS
Current Assets
Cash and cash equivalents	$	313		$	(27	)	$	286
Accounts and notes receivable, net	527			(103		)	424
Prepaid expenses and other current assets	363			(46		)	317
Advertising cooperative assets, restricted	—			176			176
Total Current Assets	1,203			—			1,203

Property, plant and equipment, net	1,533			(16		)	1,517
Goodwill	502			—			502
Intangible assets, net	90			—			90
Other assets	787			(118		)	669
Deferred income taxes	211			(25		)	186
Total Assets	$	4,326		$	(159	)	$	4,167

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and other current liabilities	$	822		$	(215	)	$	607
Income taxes payable	48			—			48
Short-term borrowings	54			—			54
Advertising cooperative liabilities	—			176			176
Total Current Liabilities	924			(39		)	885

Long-term debt	9,612			—			9,612
Other liabilities and deferred credits	1,037			(336		)	701
Total Liabilities	11,573			(375		)	11,198

Shareholders’ Deficit
Accumulated deficit	(6,965		)	238			(6,727		)
Accumulated other comprehensive loss	(282		)	(22		)	(304		)
Total Shareholders’ Deficit	(7,247		)	216			(7,031		)
Total Liabilities and Shareholders’ Deficit	$	4,326		$	(159	)	$	4,167

Under Legacy 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 Condensed Consolidated Balance Sheet and changes in these balances are reported within our Condensed Consolidated Statement of Cash Flows. The adoption of Topic 606 resulted in a decrease in Net Cash Provided by Operating Activities of $25 million during the year to date ended June 30, 2018 due to the timing of spending in these cooperatives.

On February 7, 2018, certain of our subsidiaries entered into a master services agreement with a subsidiary of Grubhub, the leading 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. 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 quarter and year to date ended June 30, 2018 we recognized income of $25 million and $91 million, respectively, which includes the appreciation in the market price of Grubhub common stock since entering into the agreement less valuation adjustments related to the transfer restrictions. The $25 million recognized in the quarter ended June 30, 2018 also includes the reversal of the valuation adjustment that was established in the first quarter of 2018 regarding the then likelihood of obtaining the necessary regulatory approvals to close the investment agreement. Changes in the fair value of our investment in Grubhub common stock are presented as Investment (income) expense, net within our Condensed Consolidated Statements of Income.