Notes to Consolidated Statements
Notes to Consolidated Statements provide supplementary information to consolidated financial statements and are considered an integral part of the financial report. They must be read as thoroughly as the financial statements themselves!
They can be separated into three major categories:
Summary of Accounting Policies. Provides an overview of major Generally Accepted Accounting Principles (GAAP) used by a company in the preparation of its financial statements (Exhibit 4.7).
Explanatory Notes. Offers a detailed overview on a number of supplementary financial metrics, including:
Fixed assets
Stock options
Financing and debt
Leases
Shareholders’ equity
Taxes
Employee benefit plans
Supplementary Information Notes. Provides additional details about a company’s operations, including:
A listing of reserves for an oil and gas company
Breakdown of unit sales by product line
Breakdown by geographic segments
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| Nature of business
The Company primarily franchises and operates McDonald’s restaurants in the food service industry. The Company also operates Boston Market and Chipotle Mexican Grill (Chipotle) in the U.S. and has a minority ownership in U.K.-based Pret A Manger. In December 2003, the Company sold its Donates Pizzeria business. All restaurants are operated either by the Company, by independent entrepreneurs under the terms of franchise arrangements (franchisees), or by affiliates and developmental licensees operating under license agreements. |
| Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Substantially all investments in affiliates owned 50% or less (primarily McDonald’s Japan) are accounted for by the equity method. |
| 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. |
| Reclassifications Certain prior period amounts have been reclassified to conform to current year presentation. |
| Revenue recognition The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees and affiliates. Sales by Company-operated restaurants are recognized on a cash basis. Fees from fran-chised and affiliated restaurants include continuing rent and service fees, initial fees and royalties received from foreign affiliates and developmental licensees. Continuing fees and royalties are recognized in the period earned. Initial fees are recognized upon opening of a restaurant, which is when the Company has performed substantially all initial services required by the franchise arrangement. |
| Foreign currency translation The functional currency of substantially all operations outside the U.S. is the respective local currency, except for a small number of countries with hyperinflationary economies, where the functional currency is the U.S. Dollar. |
| Advertising costs Advertising costs included in costs of Company-operated restaurants primarily consist of contributions to advertising cooperatives and were (in millions): 2005–$656.5; 2004–$619.5; 2003–$596.7. Production costs for radio and television advertising, primarily in the U.S., are expensed when the commercials are initially aired. These production costs as well as other marketing-related expenses included in selling, general & administrative expenses were (in millions): 2005–$114.9; 2004–$103.1; 2003–$113.1. In addition, significant advertising costs are incurred by franchisees through separate advertising cooperatives in individual markets. |
| Share-based compensation
Prior to January 1, 2005, the Company accounted for share-based compensation plans under the measurement and recognition provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Accordingly, share-based compensation was included as a pro forma disclosure in the financial statement footnotes. Effective January 1, 2005, the Company adopted the fair value recognition provisions of the Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS No. 123(R)), using the modified-prospective transition method. Under this transition method, compensation cost in 2005 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of January 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to January 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated. In 2005, in connection with the adoption of SFAS No. 123(R), the Company adjusted the mix of employee long-term incentive compensation by reducing stock options awarded and increasing certain cash-based compensation (primarily annual incentive-based compensation) and other equity-based awards. Full year 2005 results included pretax expense of $191.2 million ($129.7 million after tax or $0.10 per share) of which $154.1 million related to share-based compensation (stock options and restricted stock units) and $37.1 million related to the shift of a portion of share-based compensation to primarily cash-based. Compensation expense related to share-based awards is generally amortized over the vesting period in selling, general & administrative expenses in the Consolidated statement of income. As of December 31, 2005, there was $178.0 million of total unrecognized compensation cost related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 2.1 years. |
Source: Used with permission of McDonald’s Corporation. 2005 Annual Report, © McDonald’s Corporation, 2005.