Leases

9 Months Ended

Sep. 30, 2020

Leases [Abstract]

Leases

Note 10 – Leases

As of September 30, 2020, we operated over 7,900 Company-owned restaurants, leasing the underlying land and/or building. We generally enter into lease agreements for our restaurants with initial terms of 10 to 20 years. Most of our lease agreements contain termination options that permit us to terminate the lease agreement early if the restaurant’s unit contribution is negative for a specified period of time. We generally do not have renewal options for our leases. Such options are accounted for only when it is reasonably certain that we will exercise the options. The rent under the majority of our current restaurant lease agreements is generally payable in one of three ways: (i) fixed rent; (ii) the higher of a fixed base rent or a percentage of the restaurant’s sales; or (iii) a percentage of the restaurant’s sales. Most leases require us to pay common area maintenance fees for the leased property. In addition to restaurants leases, we also lease office spaces, logistics centers and equipment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

In limited cases, we sub-lease certain restaurants to franchisees in connection with refranchising transactions or lease our properties to other third parties. The lease payments under these leases are generally based on the higher of a fixed base rent or a percentage of the restaurant’s annual sales. Income from sub-lease agreements with franchisees or lease agreements with other third parties are included in Franchise fees and income and Other revenue, respectively, within our Condensed Consolidated Statements of Income. The financial impact of our accounting as a lessor was not significant.

Supplemental Balance Sheet
	9/30/2020		12/31/2019		Account Classification
Assets
Operating lease right-of-use assets(a)	$	2,034	$	1,985	Operating lease right-of-use assets
Finance lease right-of-use assets		17		18	Property, plant and equipment, net
Total leased assets	$	2,051	$	2,003
Liabilities
Current
Operating lease liabilities(a)	$	435	$	382	Accounts payable and other current liabilities
Finance lease liabilities		2		2	Accounts payable and other current liabilities
Non-current
Operating lease liabilities(a)		1,797		1,803	Non-current operating lease liabilities
Finance lease liabilities		25		26	Non-current finance lease liabilities
Total lease liabilities	$	2,259	$	2,213

(a) Increase in balances of operating lease right-of-use assets and liabilities mainly resulted from the acquisition of Suzhou KFC.

Summary of Lease Cost	Quarter Ended						Year to Date Ended
	9/30/2020			9/30/2019			9/30/2020			9/30/2019			Account Classification
Operating lease cost	$	124		$	117		$	365		$	351		Occupancy and other operating expenses, G&A or Franchise expenses
Finance lease cost
Amortization of leased assets		—			—			1			1		Occupancy and other operating expenses
Interest on lease liabilities		—			—			1			1		Interest expense, net
Variable lease cost (b)		84			94			188			265		Occupancy and other operating expenses or Franchise expenses
Short-term lease cost		3			3			8			8		Occupancy and other operating expenses or G&A expenses
Sub-lease income		(6	)		(7	)		(18	)		(21	)	Franchise fees and income or Other revenues
Total lease cost	$	205		$	207		$	545		$	605

(b) The Company was granted $6 million and $31 million in lease concessions from landlords related to the effects of the COVID-19 pandemic for the quarter and year to date ended September 30, 2020, respectively. The lease concessions were primarily in the form of rent reduction over the period of time when the Company’s restaurant business was adversely impacted. The Company applied the interpretive guidance in a FASB staff Q&A document issued in April 2020 and elected: (1) not to evaluate whether a concession received in response to the COVID-19 pandemic is a lease modification and (2) to assume such concession was contemplated as part of the existing lease contract with no contract modification. Such concession was recognized as negative variable lease cost in the period the concession was granted.

Supplemental Cash Flow Information	Year to Date Ended
	9/30/2020		9/30/2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	353		361
Operating cash flows from finance leases	1		1
Financing cash flows from finance leases	1		1
Right-of-use assets obtained in exchange for new lease liabilities(c):
Operating leases	193		217
Finance leases		—		—

(c) This supplemental non-cash disclosure for right-of-use (“ROU”) assets obtained in exchange for new lease liabilities also includes non-cash transactions resulting in adjustments to the lease liability or ROU asset due to modification or other reassessment events.

Lease Term and Discount Rate	9/30/2020			9/30/2019
Weighted-average remaining lease term (years)
Operating leases		6.9			7.1
Finance leases		10.9			12.0
Weighted-average discount rate
Operating leases		5.9	%		6.1	%
Finance leases		5.8	%		5.8	%

Summary of Future Lease Payments and Lease Liabilities

Maturities of lease liabilities as of September 30, 2020 were as follows:

	Amount of Operating Leases		Amount of Finance Leases		Total
Remainder of 2020	$	174	$	1	$	175
2021		500		4		504
2022		437		4		441
2023		370		3		373
2024		305		3		308
Thereafter		939		21		960
Total lease payment		2,725		36		2,761
Less: imputed undiscounted interest(d)		493		9		502
Present value of lease liabilities	$	2,232	$	27	$	2,259

(d) As the rate implicit in the lease cannot be readily determined, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the imputed interest and present value of lease payments. We used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date.

As of September 30, 2020, we have additional lease agreements that have been signed but not yet commenced, with total undiscounted minimum lease payments of $154 million. These leases will commence between the fourth quarter of 2020 and 2023 with lease terms of 1 year to 20 years.