Fair Value Measurements and Disclosures

3 Months Ended

Mar. 31, 2021

Fair Value Disclosures [Abstract]

Fair Value Measurements and Disclosures

Note 11 – Fair Value Measurements and Disclosures

The Company’s financial assets and liabilities primarily consist of cash and cash equivalents, short-term investments, long-term time deposits, accounts receivable, accounts payable and lease liabilities, and the carrying values of these assets and liabilities approximate their fair value in general.

The Company accounts for its investment in the equity securities of Meituan and Sunner at fair value, which is determined based on the respective closing market price for the shares at the end of each reporting period, with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income.

The following table is a summary of our financial assets measured on a recurring basis or disclosed at fair value and the level within the fair value hierarchy in which the measurement falls. The Company classifies its cash equivalents, short-term investments, long-term time deposits and investment in equity securities within Level 1 or Level 2 in the fair value hierarchy because it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value, respectively. No transfers among the levels within the fair value hierarchy occurred during the quarters ended March 31, 2021 and 2020.

			Fair Value Measurement or Disclosure at March 31, 2021
	Balance at March 31, 2021		Level 1		Level 2		Level 3
Cash equivalents:
Time deposits	$	410			$	410
Fixed income debt securities(a)		70				70
Total cash equivalents		480		—		480		—
Short-term investments:
Time deposits		2,058				2,058
Fixed income debt securities(a)		800				800
Structured deposits(b)		168				168
Total short-term investments		3,026		—		3,026		—
Other assets:
Investment in equity securities		405		405
Long-term time deposits		63				63
Total	$	3,974	$	405	$	3,569	$	—

			Fair Value Measurement or Disclosure at December 31, 2020
	Balance at December 31, 2020		Level 1		Level 2		Level 3
Cash equivalents:
Time deposits	$	601			$	601
Fixed income debt securities(a)		207		207
Total cash equivalents		808		207		601		—
Short-term investments:
Time deposits		2,165				2,165
Fixed income debt securities(a)		784		104		680
Variable return investments		156		156
Total short-term investments		3,105		260		2,845		—
Other assets:
Investment in equity securities		160		160
Long-term time deposits		61				61
Total	$	4,134	$	627	$	3,507	$	—

(a) Classified as held-to-maturity investments and measured at amortized cost.

(b) Represented certain structured deposits invested in the first quarter of 2021. These investments are principal-protected and provide returns in the form of both fixed and variable interests. Such variable interest rates indexed to gold prices or foreign exchange rates are considered embedded derivatives and bifurcated from host contracts, and measured at fair value on a recurring basis. The fair value change of the embedded derivatives is recorded in Investment gain or loss in our Condensed Consolidated Statements of Income. The remaining host contracts to receive guaranteed principal and fixed interest are measured at amortized cost, with accretion of interest recorded in Interest income in our Condensed Consolidated Statements of Income. As of March 31, 2021, the fair value of embedded derivatives included in Short-term investments was immaterial.

Non-Recurring Fair Value Measurements

In addition, certain of the Company’s restaurant-level assets (including operating lease ROU assets, property, plant and equipment), goodwill and intangible assets, are measured at fair value based on unobservable inputs (Level 3) on a non-recurring basis, if determined to be impaired.

In determining the fair value of restaurant-level assets, the Company considered the highest and best use of the assets from market participants’ perspective, which is represented by the higher of the forecasted discounted cash flows from operating restaurants and the price market participants would pay to sub-lease the ROU assets and acquire remaining restaurants assets, even if that use differs from the current use by the Company. The after-tax cash flows incorporate reasonable assumptions we believe a franchisee would make, such as sales growth, and include a deduction for royalties we would receive under a franchise agreement with terms substantially at market. The discount rate used in the fair value calculation is our estimate of the required rate-of-return that a franchisee would expect to receive when purchasing a similar restaurant and the related long-lived assets. In situations where the highest and best use of restaurant-level assets are represented by sub-leasing the operating lease ROU assets and acquiring remaining restaurant assets, the Company continues to use these assets in operating its restaurant business, which is consistent with its long-term strategy of growing revenue through operating restaurant concepts.

As of each relevant measurement date, the fair value of restaurant-level assets, if determined to be impaired, are primarily represented by the price market participant would pay to sub-lease the operating lease ROU assets and acquire remaining restaurants assets, which reflects the highest and best use of the assets. Significant unobservable inputs used in the fair value measurement include market rental prices, which were determined with the assistance of an independent valuation specialist. The direct comparison approach is used as the valuation technique by assuming sub-lease of each of these properties in its existing state with vacant possession. By making reference to lease transactions as available in the relevant market, comparable properties in close proximity have been selected and adjustments have been made to account for the difference in factors such as location and property size.

The following table presents amounts recognized from all non-recurring fair value measurements based on unobservable inputs (Level 3) during the quarters ended March 31, 2021 and 2020. These amounts exclude fair value measurements made for restaurants that were subsequently closed or refranchised prior to those respective period-end dates.

	Quarter Ended
	3/31/2021		3/31/2020		Account Classification
Restaurant-level impairment(a)	$	—	$	9	Closure and impairment expenses, net
Total	$	—	$	9

(a) Restaurant-level impairment charges are recorded in Closures and impairment expenses, net and resulted primarily from our semi-annual impairment evaluation of long-lived assets of individual restaurants that were being operated at the time of impairment and had not been offered for refranchising. We performed an additional impairment evaluation in the first quarter of 2020, considering the adverse effects of the COVID-19 pandemic as an impairment indicator. The fair value of assets as of the relevant measurement date, after considering the impairment charges recorded during the quarter ended March 31, 2020, was $29 million.