On December 21, 2018, we completed the acquisition of QuikOrder, LLC, an online ordering software and service provider for the restaurant industry (“QuikOrder”), who has been a provider of services to Company and franchise restaurants of our Pizza Hut U.S. business for nearly two decades. The purchase price to be allocated for accounting purposes of $77 million consisted of cash, net of cash acquired, in the amount of $66 million, settlement of a prepaid asset of $6 million related to our preexisting contractual relationship with QuikOrder and contingent consideration of $5 million. The acquisition is part of our strategy to deliver an easy and personalized online ordering experience and accelerate digital innovation. The financial results of QuikOrder have been included in our Consolidated Financial Statements since the date of the acquisition but did not significantly impact our results for the year ended December 31, 2018. Subsequent to the acquisition, fees paid by franchisees for use of the QuikOrder software are being presented within Franchise contributions for advertising and other services. Associated costs we incur are being primarily presented within Franchise advertising and other services expense.

The primary assets recorded as a result of the preliminary purchase price allocation were goodwill of $39 million and amortizable intangible assets (primarily software) of $33 million. The goodwill recorded resulted from increased synergies expected to be achieved through leveraging our scale and resources to enhance the services previously offered by QuikOrder. The goodwill amortization is deductible for tax purposes and has been allocated to the Pizza Hut U.S. reporting unit..

We recognized $434 million in our Income tax provision for the year ended December 31, 2017 as a result of the December 22, 2017 enactment of the Tax Act. During the year ended December 31, 2018, we recorded a $35 million decrease related to our provisional tax expense recorded in the fourth quarter of 2017 associated with the Tax Act. See Note 17.

The Refranchising (gain) loss by reportable segment is presented below. Given the size and volatility of recent 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.

As a result of classifying restaurant and related assets as held-for-sale and ceasing depreciation expense as well as recording any related write-downs to fair value, depreciation expense was reduced versus what would have otherwise been recorded by $3 million and $10 million during the years ended December 31, 2018 and 2017, respectively. Our CODM does not consider the impact of these depreciation reductions, which were recorded within Company restaurant expenses when assessing segment performance. These depreciation reductions were not allocated to the Division segments resulting in depreciation expense continuing to be recorded within our Divisional results at the rate at which it was prior to the held-for-sale classification.

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. We incurred pre-tax costs of $8 million, $23 million and $67 million related to our Strategic Transformation Initiatives in 2018, 2017 and 2016, respectively, primarily recorded in G&A. In 2018 and 2017, these costs included contract termination costs and relocation and severance costs for restaurant-support center employees. In 2016, these costs included restaurant-support center employee severance costs, charges associated with a voluntary retirement program offered to certain U.S. restaurant-support center employees, consulting costs incurred to facilitate YUM's Strategic Transformation Initiatives and losses associated with our sale of Corporate aircraft upon our decision to no longer own aircraft. Due to the scope of the initiatives as well as their significance, our CODM does not consider the associated cost when assessing segment performance. As such, these costs are not being allocated to any of our segment operating results for performance reporting purposes.

In connection with the Separation, 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. Through October 31, 2018, these Yum China awards could be settled in cash, as opposed to stock, which requires recognition of the fair value of these awards within G&A in our Consolidated Income Statement. During 2018, 2017 and 2016, we recorded pre-tax credits of $3 million, charges of $18 million and charges of $30 million, respectively, related to these awards due to changes in the market price of Yum China's common stock. Given these adjustments

As of October 31, 2018, deferrals in phantom shares of Yum China common stock are no longer an investment option within our EID Plan and any balances relating to these shares were moved to another available EID Plan investment option as selected by the participants. Amounts directed into cash or phantom shares of a Stock Index Fund or a Bond Index Fund remained classified as a liability and any appreciation or depreciation in these investments from the transfer date forward will be recognized as compensation expense and included in our segment operating results consistent with existing investments in these funds. Any balances directed into phantom shares of YUM Common Stock were reclassified to Common Stock on our Consolidated Balance Sheet. We do not recognize compensation expense for the appreciation or depreciation, if any, of investments in phantom shares of our Common Stock. See Note 15 for further description of our EID Plan.

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 franchisee commitment to incremental advertising as well as digital and technology contributions (the “Transformation Agreement”). In connection with the Transformation Agreement we anticipate investing approximately $90 million from 2017 to 2019 to upgrade restaurant equipment to improve operations, fund improvements in restaurant technology and enhance digital and e-commerce capabilities.

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, but that upon adoption of Topic 606 in 2018 were capitalized. In 2018, both amounts capitalized upon adoption of Topic 606 and franchisee incentive payments capitalized thereafter 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 payments relate.

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 being considered by our CODM when assessing segment performance in 2017 or 2018. For the same reasons, franchisee incentive payments in 2017 that were expensed as incurred under Legacy GAAP were not considered in assessing segment performance in 2017. As such, these amounts were not allocated to the Pizza Hut Division operating segment results for performance reporting purposes. Depreciation on capital investments made as part of the Transformation Agreement 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 franchisee incentive payments that were capitalized upon the adoption of Topic 606 and amortization related to franchisee incentive payments that are being capitalized going forward are being allocated to Pizza Hut Division operating segment results starting in 2018.

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 year ended December 31, 2018, we incurred $12.5 million in related incremental system advertising expense, fulfilling our advertising spend obligation. We funded approximately $25 million of such advertising during 2017, which was expensed in the third and fourth quarters of 2017. These advertising amounts were recorded primarily in Franchise and property expenses and are included in Pizza Hut's segment operating results.

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 $17 million and $26 million during the years ended December 31, 2017 and 2016, respectively. We recorded total pre-tax charges for such amounts 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

Upon adoption of Topic 606 in 2018, approximately $100 million of these incentives paid to franchisees from 2015 through 2017 were capitalized, which was net of amortization of $19 million. These capitalized amounts are now 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.

In addition to the investments above, we agreed to fund $60 million of incremental system advertising from 2015 through 2018. During the years ended December 31, 2018, 2017 and 2016, we incurred $10 million, $20 million and $20 million, respectively, in incremental system advertising expense. As $10 million in incremental system advertising expense was incurred in 2015, we have now fulfilled our advertising spend obligation. These advertising amounts were recorded primarily in Franchise and property expenses and were included in the KFC Division segment operating results.

As discussed in Note 2, we adopted Topic 606 at the beginning of the year ended December 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 Consolidated Balance Sheet as of January 1, 2018:



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	1,594			2				1,596
Goodwill	512			—				512
Intangible assets, net	214			9				223
Other assets	345			118				463
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 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.



CONSOLIDATED STATEMENT OF INCOME
	Year ended 12/31/2018
Revenues	As Reported			Impact				Balances under Legacy GAAP
Company sales	$	2,000		$	—			$	2,000
Franchise and property revenues	2,482			43				2,525
Franchise contributions for advertising and other services	1,206			(1,206		)		—
Total revenues	5,688			(1,163		)		4,525
Costs and Expenses, Net
Company restaurant expenses	1,634			—				1,634
General and administrative expenses	895			—				895
Franchise and property expenses	188			27				215
Franchise advertising and other services expense	1,208			(1,208		)		—
Refranchising (gain) loss	(540		)	4				(536		)
Other (income) expense	7			—				7
Total costs and expenses, net	3,392			(1,177		)		2,215
Operating Profit	2,296			14			^(a)	2,310
Investment (income) expense, net	(9		)	—				(9		)
Other pension (income) expense	14			—				14
Interest expense, net	452			—				452
Income from continuing operations before income taxes	1,839			14				1,853
Income tax provision (benefit)	297			3				300
Net Income	$	1,542		$	11			$	1,553

Basic Earnings Per Common Share	$	4.80		$	0.03			$	4.83

Diluted Earnings Per Common Share	$	4.69		$	0.03			$	4.72

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 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 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.



CONSOLIDATED BALANCE SHEET
	As Reported 12/31/2018			Impact			Balances under Legacy GAAP 12/31/2018
ASSETS
Current Assets
Cash and cash equivalents	$	292		$	(13	)	$	279
Accounts and notes receivable, net	561			(120		)	441
Prepaid expenses and other current assets	354			(107		)	247
Advertising cooperative assets, restricted	—			241			241
Total Current Assets	1,207			1			1,208

Property, plant and equipment, net	1,237			(2		)	1,235
Goodwill	525			—			525
Intangible assets, net	242			(16		)	226
Other assets	724			(127		)	597
Deferred income taxes	195			(25		)	170
Total Assets	$	4,130		$	(169	)	$	3,961

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and other current liabilities	$	911		$	(287	)	$	624
Income taxes payable	69			—			69
Short-term borrowings	321			—			321
Advertising cooperative liabilities	—			241			241
Total Current Liabilities	1,301			(46		)	1,255

Long-term debt	9,751			—			9,751
Other liabilities and deferred credits	1,004			(354		)	650
Total Liabilities	12,056			(400		)	11,656

Shareholders’ Deficit
Accumulated deficit	(7,592		)	251			(7,341		)
Accumulated other comprehensive loss	(334		)	(20		)	(354		)
Total Shareholders’ Deficit	(7,926		)	231			(7,695		)
Total Liabilities and Shareholders’ Deficit	$	4,130		$	(169	)	$	3,961

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 Consolidated Balance Sheet and changes in these balances are reported within our Consolidated Statement of Cash Flows.

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 year ended December 31, 2018 we recognized pre-tax income of $14 million, which includes the appreciation in the market price of Grubhub common stock less valuation adjustments related to the transfer restrictions. Changes in the fair value of our investment in Grubhub common stock are presented as Investment (income) expense, net within our Consolidated Statements of Income.

During the first quarter of 2017, as a result of the completion of a pension data review and reconciliation, we recorded a non-cash, out-of-year charge of $22 million to Other pension (income) expense to adjust our historical U.S. pension liability related to our deferred vested participants. Our CODM does not consider the impact of this charge when assessing segment performance given the number of years over which it accumulated. As such, this cost is not being allocated to any of our segment operating results for performance reporting purposes. See Note 14 for further discussion of our pension plans.

During the fourth quarter of 2016, the Company allowed certain former employees with deferred vested balances in the YUM Retirement Plan ("the Plan") an opportunity to voluntarily elect an early payout of their pension benefits. As a result of settlement payments made of approximately $205 million related to this program, all of which were funded from existing Plan assets, we recorded a settlement charge of $24 million to Other pension (income) expense. Due to the size and non-recurring nature of the program, our CODM does not consider the impact of these charges when assessing performance so they were not allocated to any of our segment operating results for performance reporting purposes.

As discussed in Note 2, we have changed our fiscal year from a year ending on the last Saturday of December to a year beginning on January 1 and ending on December 31 of each year commencing with the year ending December 31, 2017. We also removed the monthly or period reporting lags certain of our international subsidiaries historically used to report results. The impacts on our Consolidated Financial Statements of retrospectively applying these changes are included below:



	2016
	As Previously Reported		Adjustments				After Change in Reporting Calendar
Total revenues	$	6,366	$	(10	)		$	6,356
Operating Profit	1,625		25			^(a)	1,650		^(b)
Income from continuing operations	994		24				1,018
Income from discontinued operations, net of tax	625		—				625
Net Income	$	1,619	$	24			$	1,643

Diluted EPS from continuing operations	$	2.48	$	0.06			$	2.54
Diluted EPS from discontinued operations	1.56		—				1.56
Diluted EPS	$	4.04	$	0.06			$	4.10