Analysis: Nature of Business, Basis of Reporting, Significant Accounting Policies, Revenues Recognition

Entity Registrant Name MCDONALDS CORP
CIK 0000063908
Accession number 0000063908-14-000019
Link to XBRL instance http://www.sec.gov/Archives/edgar/data/63908/000006390814000019/mcd-20131231.xml
Fiscal year end --12-31
Fiscal year focus 2013
Fiscal period focus FY
Current balance sheet date 2013-12-31
Current year-to-date income statement start date 2013-01-01

Commentary All disclosures seem appropriate.

NATURE OF BUSINESS concept us-gaap:NatureOfOperations
NATURE OF BUSINESS
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and foreign affiliates and developmental licensees under license agreements.

BASIS OF REPORTING concept us-gaap:ConsolidationPolicyTextBlock
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. Investments in affiliates owned 50% or less (primarily McDonald’s Japan) are accounted for by the equity method.
On an ongoing basis, the Company evaluates its business relationships such as those with franchisees, joint venture partners, developmental licensees, suppliers, and advertising cooperatives to identify potential variable interest entities. Generally, these businesses qualify for a scope exception under the variable interest entity consolidation guidance. The Company has concluded that consolidation of any such entity is not appropriate for the periods presented.

SIGNIFICANT ACCOUNTING POLICIES concept us-gaap:SignificantAccountingPoliciesTextBlock
Summary of Significant Accounting Policies
NATURE OF BUSINESS
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and foreign affiliates and developmental licensees under license agreements.
The following table presents restaurant information by ownership type:
Restaurants at December 31,
2013

 
2012

 
2011

Conventional franchised
20,355

 
19,869

 
19,527

Developmental licensed
4,747

 
4,350

 
3,929

Foreign affiliated
3,589

 
3,663

 
3,619

Franchised
28,691

 
27,882

 
27,075

Company-operated
6,738

 
6,598

 
6,435

Systemwide restaurants
35,429

 
34,480

 
33,510


The results of operations of restaurant businesses purchased and sold in transactions with franchisees were not material either individually or in the aggregate to the consolidated financial statements for periods prior to purchase and sale.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. Investments in affiliates owned 50% or less (primarily McDonald’s Japan) are accounted for by the equity method.
On an ongoing basis, the Company evaluates its business relationships such as those with franchisees, joint venture partners, developmental licensees, suppliers, and advertising cooperatives to identify potential variable interest entities. Generally, these businesses qualify for a scope exception under the variable interest entity consolidation guidance. The Company has concluded that consolidation of any such entity is not appropriate for the periods presented.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company’s revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and foreign affiliates.
Sales by Company-operated restaurants are recognized on a cash basis. The Company presents sales net of sales tax and other sales-related taxes. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and may include initial fees. Continuing rent and royalties are recognized in the period earned. Initial fees are recognized upon opening of a restaurant or granting of a new franchise term, which is when the Company has performed substantially all initial services required by the franchise arrangement.
FOREIGN CURRENCY TRANSLATION
Generally, the functional currency of operations outside the U.S. is the respective local currency.
ADVERTISING COSTS
Advertising costs included in operating expenses of Company-operated restaurants primarily consist of contributions to advertising cooperatives and were (in millions): 2013$808.4; 2012$787.5; 2011$768.6. Production costs for radio and television advertising are expensed when the commercials are initially aired. These production costs, primarily in the U.S., as well as other marketing-related expenses included in Selling, general & administrative expenses were (in millions): 2013$75.4; 2012$113.5; 2011$74.4. Costs related to the Olympics sponsorship are included in these expenses for 2012. In addition, significant advertising costs are incurred by franchisees through contributions to advertising cooperatives in individual markets.
SHARE-BASED COMPENSATION
Share-based compensation includes the portion vesting of all share-based awards granted based on the grant date fair value.
Share-based compensation expense and the effect on diluted earnings per common share were as follows:
In millions, except per share data
2013

 
2012

 
2011

Share-based compensation expense
$
89.1

 
$
93.4

 
$
86.2

After tax
$
60.6

 
$
63.2

 
$
59.2

Earnings per common share-diluted
$
0.06

 
$
0.06

 
$
0.05


Compensation expense related to share-based awards is generally amortized on a straight-line basis over the vesting period in Selling, general & administrative expenses. As of December 31, 2013, there was $109.0 million of total unrecognized compensation cost related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 2.0 years.
The fair value of each stock option granted is estimated on the date of grant using a closed-form pricing model. The following table presents the weighted-average assumptions used in the option pricing model for the 2013, 2012 and 2011 stock option grants. The expected life of the options represents the period of time the options are expected to be outstanding and is based on historical trends. Expected stock price volatility is generally based on the historical volatility of the Company’s stock for a period approximating the expected life. The expected dividend yield is based on the Company’s most recent annual dividend rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant with a term equal to the expected life.
 
Weighted-average assumptions
 
2013

2012

2011

Expected dividend yield
3.5
%
2.8
%
3.2
%
Expected stock price volatility
20.6
%
20.8
%
21.5
%
Risk-free interest rate
1.2
%
1.1
%
2.8
%
Expected life of options
(in years)
6.1

6.1

6.3

Fair value per option granted
$
11.09

$
13.65

$
12.18


PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, with depreciation and amortization provided using the straight-line method over the following estimated useful lives: buildings–up to 40 years; leasehold improvements–the lesser of useful lives of assets or lease terms, which generally include option periods; and equipment–three to 12 years.

GOODWILL
Goodwill represents the excess of cost over the net tangible assets and identifiable intangible assets of acquired restaurant businesses. The Company's goodwill primarily results from purchases of McDonald's restaurants from franchisees and ownership increases in subsidiaries or affiliates, and it is generally assigned to the reporting unit expected to benefit from the synergies of the combination. If a Company-operated restaurant is sold within 24 months of acquisition, the goodwill associated with the acquisition is written off in its entirety. If a restaurant is sold beyond 24 months from the acquisition, the amount of goodwill written off is based on the relative fair value of the business sold compared to the reporting unit (defined as each individual country).
The Company conducts goodwill impairment testing in the fourth quarter of each year or whenever an indicator of impairment exists. If an indicator of impairment exists (e.g., estimated earnings multiple value of a reporting unit is less than its carrying value), the goodwill impairment test compares the fair value of a reporting unit, generally based on discounted future cash flows, with its carrying amount including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is measured as the difference between the implied fair value of the reporting unit's goodwill and the carrying amount of goodwill. Historically, goodwill impairment has not significantly impacted the consolidated financial statements.
The following table presents the 2013 activity in goodwill by segment:
In millions
U.S.

 
Europe

APMEA(1)
 
Other Countries
& Corporate(2)
 
Consolidated
 
Balance at December 31, 2012
$
1,294.2

 
$
881.4

 
$
438.7

 
$
189.7

 
$
2,804.0

Net restaurant purchases (sales)
(0.6
)
 
50.4

 
30.7

 
15.7

 
96.2

Currency translation
 
 
26.3

 
(40.7
)
 
(13.1
)
 
(27.5
)
Balance at December 31, 2013
$
1,293.6

 
$
958.1

 
$
428.7

 
$
192.3

 
$
2,872.7

(1)
APMEA represents Asia/Pacific, Middle East and Africa.
(2)
Other Countries & Corporate represents Canada, Latin America and Corporate.
 
 
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of annually reviewing McDonald’s restaurant assets for potential impairment, assets are initially grouped together at a television market level in the U.S. and at a country level for each of the international markets. The Company manages its restaurants as a group or portfolio with significant common costs and promotional activities; as such, an individual restaurant’s cash flows are not generally independent of the cash flows of others in a market. If an indicator of impairment (e.g., negative operating cash flows for the most recent trailing 24-month period) exists for any grouping of assets, an estimate of undiscounted future cash flows produced by each individual restaurant within the asset grouping is compared to its carrying value. If an individual restaurant is determined to be impaired, the loss is measured by the excess of the carrying amount of the restaurant over its fair value as determined by an estimate of discounted future cash flows.
Losses on assets held for disposal are recognized when management and the Board of Directors, as required, have approved and committed to a plan to dispose of the assets, the assets are available for disposal, the disposal is probable of occurring within 12 months, and the net sales proceeds are expected to be less than its net book value, among other factors. Generally, such losses relate to restaurants that have closed and ceased operations as well as other assets that meet the criteria to be considered “available for sale”.
FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value on a recurring basis, and certain non-financial assets and liabilities on a nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.
Level 2 – inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
Certain of the Company’s derivatives are valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves, option volatilities and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company. 

Certain Financial Assets and Liabilities Measured at Fair Value
The following tables present financial assets and liabilities measured at fair value on a recurring basis by the valuation hierarchy as defined in the fair value guidance: 
December 31, 2013
 
 
 
 
 
 
In millions
Level 1*

 
Level 2

 
Carrying
Value
 
Investments
$
27.6

 
 
 
 
$
27.6

Derivative assets
128.2

 
$
71.6

 
 
199.8

Total assets at fair value
$
155.8

 
$
71.6

 
 
$
227.4

Derivative liabilities
 
 
$
(179.3
)
 
 
$
(179.3
)
Total liabilities at fair value
 
 
$
(179.3
)
 
 
$
(179.3
)
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
In millions
Level 1*

 
Level 2

 
Carrying
Value
 
Investments
$
155.1

 
 
 
 
$
155.1

Derivative assets
132.3

 
$
86.1

 
 
218.4

Total assets at fair value
$
287.4

 
$
86.1

 
 
$
373.5

Derivative liabilities
 
 
$
(42.6
)
 
 
$
(42.6
)
Total liabilities at fair value
 
 
$
(42.6
)
 
 
$
(42.6
)
*
Level 1 is comprised of investments and derivatives that hedge market driven changes in liabilities associated with the Company’s supplemental benefit plans.
Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). For the year ended December 31, 2013, no material fair value adjustments or fair value measurements were required for non-financial assets or liabilities.
Certain Financial Assets and Liabilities not Measured at Fair Value
At December 31, 2013, the fair value of the Company’s debt obligations was estimated at $15.0 billion, compared to a carrying amount of $14.1 billion. The fair value was based on quoted market prices, Level 2 within the valuation hierarchy. The carrying amount for both cash equivalents and notes receivable approximate fair value.
FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The Company documents its risk management objective and strategy for undertaking hedging transactions, as well as all relationships between hedging instruments and hedged items. The Company’s derivatives that are designated for hedge accounting consist mainly of interest rate swaps, foreign currency forwards, foreign currency options, and cross-currency swaps, further explained in the "Fair Value," "Cash Flow" and "Net Investment" hedge sections.
The Company also enters into certain derivatives that are not designated for hedge accounting. The Company has entered into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded primarily in Selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. Since these derivatives are not designated for hedge accounting, the changes in the fair value of these derivatives are recognized immediately in Nonoperating (income) expense together with the currency gain or loss from the hedged balance sheet position. A portion of the Company’s foreign currency options (more fully described in the "Cash Flow Hedges" section) are undesignated as hedging instruments as the underlying foreign currency royalties are earned.
All derivative instruments designated for hedge accounting are classified as fair value, cash flow or net investment hedges. All derivatives (including those not designated for hedge accounting) are recognized on the Consolidated balance sheet at fair value and classified based on the instruments’ maturity dates. Changes in the fair value measurements of the derivative instruments are reflected as adjustments to other comprehensive income ("OCI") and/or current earnings.
 


The following table presents the fair values of derivative instruments included on the Consolidated balance sheet as of December 31, 2013 and 2012:
  
Derivative Assets
 
Derivative Liabilities
In millions
Balance Sheet Classification
 
2013

 
2012

 
Balance Sheet Classification
 
2013

 
2012

Derivatives designated for hedge accounting
 
 
 
 
 
 
 
 
Foreign currency
Prepaid expenses and other current assets
 
$
28.3

 
$
5.0

 
Accrued payroll and other liabilities
 
$
(28.8
)
 
$
(3.5
)
Interest rate
Prepaid expenses and other current assets
 

 
4.2

 
 
 
 
 
 
Commodity
Miscellaneous other assets
 

 
35.3

 
Other long-term liabilities
 

 
(0.2
)
Foreign currency
Miscellaneous other assets
 
2.5

 
2.5

 
Other long-term liabilities
 
(114.7
)
 
(32.1
)
Interest rate
Miscellaneous other assets
 
24.8

 
38.1

 
Other long-term liabilities
 
(12.0
)
 

Total derivatives designated for hedge accounting
 
$
55.6

 
$
85.1

 
 
 
$
(155.5
)
 
$
(35.8
)
Derivatives not designated for hedge accounting
 
 
 
 
 
 
 
 
Equity
Prepaid expenses and other current assets
 
$
6.7

 
$
132.3

 
 
 
 
 
 
Foreign currency
Prepaid expenses and other current assets
 
9.3

 
1.0

 
Accrued payroll and other liabilities
 
$
(23.8
)
 
$
(6.8
)
Equity
Miscellaneous other assets
 
128.2

 

 
 
 
 
 
 
Total derivatives not designated for hedge accounting
 
$
144.2

 
$
133.3

 
 
 
$
(23.8
)
 
$
(6.8
)
Total derivatives
 
$
199.8

 
$
218.4

 
 
 
$
(179.3
)
 
$
(42.6
)

The following table presents the pretax amounts affecting income and OCI for the years ended December 31, 2013 and 2012, respectively:
In millions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives in
Fair Value
Hedging
Relationships
 
Gain (Loss)
Recognized in Income
on Derivative
 
Hedged Items in
Fair Value
Hedging
 Relationships
 
Gain (Loss)
Recognized in Income on
Related Hedged Items
 
 
 
 
 
 
 
 
 
 
 
 
2013

 
2012

 
 
 
 
 
 
 
2013

 
 
 
2012
 
Interest rate
 
 
$
(29.5
)
 
$
(13.0
)
 
Fixed-rate debt
 
 
$
29.5

 
 
 
 
$
13.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives in
Cash Flow
Hedging
Relationships
 
Gain (Loss) Recognized in
Accumulated OCI on Derivative
(Effective Portion)
 
Gain (Loss)
Reclassified into Income
from Accumulated OCI
 (Effective Portion)
 
Gain (Loss)
Recognized in Income on
Derivative (Amount Excluded
from Effectiveness Testing and
Ineffective Portion)
 
 
 
 
 
 
 
 
 
 
 
 
2013

 
2012

 
 
2013

 
2012

 
 
2013

 
 
 
2012
 
Commodity
 
 
$
(34.1
)
 
$
35.1

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
 
 
(65.5
)
 
(6.4
)
 
 
$
(50.3
)
 
$
(15.8
)
 
 
$
(6.1
)
 
 
 
 
$
(12.3
)
Interest rate(1)
 
 

 
(4.6
)
 
 
(0.4
)
 
0.5

 
 

 
 
 
 

Total
 
 
$
(99.6
)
 
$
24.1

 
 
$
(50.7
)
 
$
(15.3
)
 
 
$
(6.1
)
 
 
 

$
(12.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
Recognized in
Accumulated OCI
(Effective Portion)
 
 
 
Derivatives Not
Designated for
Hedge Accounting
 
Gain (Loss)
Recognized in
Income
on Derivative
Net Investment
Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013

 
2012

 
 
 
 
 
 
 
 
 
 
2013

 
2012

Foreign currency denominated debt
 
 
$
(382.8
)
 
$
(61.7
)
 
 
 
 
 
 
Foreign currency
 
 
$
(30.2
)
 
$
(13.4
)
Foreign currency derivatives
 
 
(18.4
)
 
(23.3
)
 
 
 
 
 
 
Equity(2)
 
 
 
21.8

 
(16.2
)
Total
 
 
$
(401.2
)
 
$
(85.0
)
 
 
 
 
 
 
Total
 
 
$
(8.4
)
 
$
(29.6
)
Gains (losses) recognized in income on derivatives are recorded in Nonoperating (income) expense, net unless otherwise noted.
(1)
The amount of gain (loss) reclassified from accumulated OCI into income is recorded in Interest expense.
(2)
The amount of gain (loss) recognized in income on the derivatives used to hedge the supplemental benefit plan liabilities is primarily recorded in Selling, general & administrative expenses.


Fair Value Hedges
The Company enters into fair value hedges to reduce the
exposure to changes in the fair values of certain liabilities. The Company's fair value hedges convert a portion of its fixed-rate debt into floating-rate debt by use of interest rate swaps. At December 31, 2013, $2.2 billion of the Company's outstanding fixed-rate debt was effectively converted. All of the Company’s interest rate swaps meet the shortcut method requirements. Accordingly, changes in the fair value of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. No ineffectiveness has been recorded to net income related to interest rate swaps designated as fair value hedges for the year ended December 31, 2013.
Cash Flow Hedges
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. The types of cash flow hedges the Company enters into include interest rate swaps, foreign currency forwards, foreign currency options and cross currency swaps.
The Company periodically uses interest rate swaps to effectively convert a portion of floating-rate debt, including forecasted debt issuances, into fixed-rate debt. The agreements are intended to reduce the impact of interest rate changes on future interest expense.
To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards and foreign currency options to hedge a portion of anticipated exposures.
When the U.S. dollar strengthens against foreign currencies, the decline in value of future foreign denominated royalties is offset by gains in the fair value of the foreign currency forwards and/or foreign currency options. Conversely, when the U.S. dollar weakens, the increase in the value of future foreign denominated royalties is offset by losses in the fair value of the foreign currency forwards and/or foreign currency options.
Although the fair value changes in the foreign currency options may fluctuate over the period of the contract, the Company’s total loss on a foreign currency option is limited to the upfront premium paid for the contract; however, the potential gains on a foreign currency option are unlimited. In some situations, the Company uses foreign currency collars, which limit the potential gains and lower the upfront premium paid, to protect against currency movements.
The hedges cover the next 19 months for certain exposures and are denominated in various currencies. As of December 31, 2013, the Company had derivatives outstanding with an equivalent notional amount of $730.3 million that were used to hedge a portion of forecasted foreign currency denominated royalties.
The Company excludes the time value of foreign currency options from its effectiveness assessment on its cash flow hedges. As a result, changes in the fair value of the derivatives due to this component, as well as the ineffectiveness of the hedges, are recognized in earnings currently. The effective portion of the gains or losses on the derivatives is reported in the cash flow hedging component of OCI in shareholders’ equity and reclassified into earnings in the same period or periods in which the hedged transaction affects earnings.
The Company uses cross-currency swaps to hedge the risk of cash flows associated with certain foreign currency denominated debt, including forecasted interest payments, and has elected cash flow hedge accounting. The hedges cover periods up to 47 months and have an equivalent notional amount of $346.9 million.
The Company manages its exposure to energy-related transactions in certain markets by entering into purchase and sale agreements. Previously, some of these agreements were considered commodity forwards and the Company elected cash flow hedge accounting, the impact of which was immaterial. In 2013, the Company determined these transactions were now eligible for the normal purchase/normal sale scope exception, which meant no further derivative or hedge accounting was required.
The Company recorded after tax adjustments to the cash flow hedging component of accumulated OCI in shareholders’ equity. The Company recorded a net decrease of $37.5 million for the year ended December 31, 2013 and a net increase of $30.6 million for the year ended December 31, 2012. Based on interest rates and foreign exchange rates at December 31, 2013, the $2.3 million in cumulative cash flow hedging losses, after tax, at December 31, 2013, is not expected to have a significant effect on earnings over the next 12 months.
Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders’ equity in the foreign currency translation component of OCI and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of December 31, 2013, $4.7 billion of the Company’s third party foreign currency denominated debt, $4.2 billion of intercompany foreign currency denominated debt, and $827.4 million of derivatives were designated to hedge investments in certain foreign subsidiaries and affiliates.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by the counterparties to its hedging instruments. The counterparties to these agreements consist of a diverse group of financial institutions and market participants. The Company continually monitors its positions and the credit ratings of its counterparties and adjusts positions as appropriate. The Company did not have significant exposure to any individual counterparty at December 31, 2013 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, even for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At December 31, 2013, neither the Company nor its counterparties were required to post collateral on any derivative position, other than on hedges of certain of the Company’s supplemental benefit plan liabilities where its counterparties were required to post collateral on their liability positions.
INCOME TAX UNCERTAINTIES
The Company, like other multi-national companies, is regularly audited by federal, state and foreign tax authorities, and tax assessments may arise several years after tax returns have been filed. Accordingly, tax liabilities are recorded when, in management’s judgment, a tax position does not meet the more likely than not threshold for recognition. For tax positions that meet the more likely than not threshold, a tax liability may still be recorded depending on management’s assessment of how the tax position will ultimately be settled.
The Company records interest and penalties on unrecognized tax benefits in the provision for income taxes.
PER COMMON SHARE INFORMATION
Diluted earnings per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation calculated using the treasury stock method, of (in millions of shares): 20137.6; 201210.1; 201112.8. Stock options that were not included in diluted weighted-average shares because they would have been antidilutive were (in millions of shares): 20134.7; 20124.7; 20110.0.
The Company has elected to exclude the pro forma deferred tax asset associated with share-based compensation in earnings per share.
STATEMENT OF CASH FLOWS
The Company considers short-term, highly liquid investments with an original maturity of 90 days or less to be cash equivalents.
SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date the financial statements were issued and filed with the U.S. Securities and Exchange Commission ("SEC"). There were no subsequent events that required recognition or disclosure.

REVENUE RECOGNITION concept us-gaap:RevenueRecognitionPolicyTextBlock
REVENUE RECOGNITION
The Company’s revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and foreign affiliates.
Sales by Company-operated restaurants are recognized on a cash basis. The Company presents sales net of sales tax and other sales-related taxes. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and may include initial fees. Continuing rent and royalties are recognized in the period earned. Initial fees are recognized upon opening of a restaurant or granting of a new franchise term, which is when the Company has performed substantially all initial services required by the franchise arrangement.


*

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