Notes to Consolidated Financial Statements (Tabular amounts in millions, except share data) Note 1 - Description of Business Yum! Brands, Inc. and its subsidiaries (collectively referred to herein as the "Company" "YUM," "we," "us" or "our") franchises or operates a system of over 50,000 quick service restaurants in more than 150 countries and territories. At December 31, 2019, 98% of these restaurants were owned and operated by franchisees. The Company's KFC, Pizza Hut and Taco Bell brands (collectively the "Concepts") are global leaders of the chicken, pizza and Mexican-style food categories. Note 19 - Contingencies Lease Guarantees As a result of having assigned our interest in obligations under real estate leases as a condition to the refranchising of certain Company-owned restaurants, and guaranteeing certain other leases, we are frequently secondarily liable on lease agreements. These leases have varying terms, the latest of which expires in 2065. As of December 31, 2019, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $475 million. The present value of these potential payments discounted at our pre-tax cost of debt at December 31, 2019 was approximately $400 million. Our franchisees are the primary lessees under the vast majority of these leases. We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of non-payment under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases. Accordingly, the liability recorded for our probable exposure under such leases at December 31, 2019 and December 31, 2018 was not material. Insurance Programs We are self-insured for a substantial portion of our current and prior years' coverage including property and casualty losses. To mitigate the cost of our exposures for certain property and casualty losses, we self-insure the risks of loss up to defined maximum per occurrence retentions on a line-by-line basis. The Company then purchases insurance coverage, up to a certain limit, for losses that exceed the self-insurance per occurrence retention. The insurers' maximum aggregate loss limits are significantly above our actuarially determined probable losses; therefore, we believe the likelihood of losses exceeding the insurers' maximum aggregate loss limits is remote. The following table summarizes the 2019 and 2018 activity related to our net self-insured property and casualty reserves as of December 31, 2019. Beginning Balance Expense Payments Ending Balance eginning Balance Expense Payments nung Balance 9 2019 Activity 2018 Activity 66 84 (21) $ (29) $ 54 66 $ 11 Due to the inherent volatility of actuarially determined property and casualty loss estimates, it is reasonably possible that we could experience changes in estimated losses which could be material to our growth in quarterly and annual Net Income. We believe that we have recorded reserves for property and casualty losses at a level which has substantially mitigated the potential negative impact of adverse developments and/or volatility. In the U.S. and in certain other countries, we are also self-insured for healthcare claims and long-term disability for eligible participating employees subject to certain deductibles and limitations. We have 12 3 5 Legal Proceedings We are subject to various claims and contingencies related to lawsuits, real estate, environmental and other matters arising in the normal course of business. An accrual is recorded with respect to claims or contingencies for which a loss is determined to be probable and reasonably estimable. Yum! Restaurants India Private Limited (CYRIPL"), a Yum subsidiary in India, is the subject of a regulatory enforcement action in India (the "Action"). The Action alleges, among other things, that KFC International Holdings, Inc. and Pizza Hut International failed to satisfy certain conditions imposed by the Secretariat for Industrial Approval in 1993 and 1994 when those companies were granted permission for foreign investment and operation in India. The conditions at issue include an alleged minimum investment commitment and store build requirements as well as limitations on the remittance of fees outside of India. The Action originated with a complaint and show cause notice filed in 2009 against YRIPL by the Deputy Director of the Directorate of Enforcement ("DOE") of the Indian Ministry of Finance following an income tax audit for the years 2002 and 2003. The matter was argued at hearing in 2015, but no order was issued. Following a change in the incumbent official holding the position of Special Director of DOE (the "Special Director"), the matter resumed in 2018 and several additional hearings were conducted. On January 29, 2020, the Special Director issued an order imposing a penalty on YRIPL and certain former directors of approximately Indian Rupee 11 billion, or approximately $156 million. Of this amount, approximately $150 million relates to the alleged failure to invest a total of $80 million in India within an initial seven year period. We have been advised by external counsel that the order is flawed and that several options for appeal exist. We deny liability and intend to continue vigorously defending this matter. We do not consider the risk of any significant loss arising from this order to be probable. 2. In your own words, describe what the Insurance Program liability is about. How much liability did Yum! estimate for this contingency at December 31, 2019? 3. Yum! says an accrual is recorded with respect to claims or contingencies when two things happen. List them here. A. B. 4. In your own words, describe what the "Action" matter is about. 5. Even though Yum! was issued an order imposing a $156 million penalty for the "Action" it still feels the likelihood of a liability is not probable. Why? Notes to Consolidated Financial Statements (Tabular amounts in millions, except share data) Note 1 - Description of Business Yum! Brands, Inc. and its subsidiaries (collectively referred to herein as the "Company" "YUM," "we," "us" or "our") franchises or operates a system of over 50,000 quick service restaurants in more than 150 countries and territories. At December 31, 2019, 98% of these restaurants were owned and operated by franchisees. The Company's KFC, Pizza Hut and Taco Bell brands (collectively the "Concepts") are global leaders of the chicken, pizza and Mexican-style food categories. Note 19 - Contingencies Lease Guarantees As a result of having assigned our interest in obligations under real estate leases as a condition to the refranchising of certain Company-owned restaurants, and guaranteeing certain other leases, we are frequently secondarily liable on lease agreements. These leases have varying terms, the latest of which expires in 2065. As of December 31, 2019, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $475 million. The present value of these potential payments discounted at our pre-tax cost of debt at December 31, 2019 was approximately $400 million. Our franchisees are the primary lessees under the vast majority of these leases. We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of non-payment under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases. Accordingly, the liability recorded for our probable exposure under such leases at December 31, 2019 and December 31, 2018 was not material. Insurance Programs We are self-insured for a substantial portion of our current and prior years' coverage including property and casualty losses. To mitigate the cost of our exposures for certain property and casualty losses, we self-insure the risks of loss up to defined maximum per occurrence retentions on a line-by-line basis. The Company then purchases insurance coverage, up to a certain limit, for losses that exceed the self-insurance per occurrence retention. The insurers' maximum aggregate loss limits are significantly above our actuarially determined probable losses; therefore, we believe the likelihood of losses exceeding the insurers' maximum aggregate loss limits is remote. The following table summarizes the 2019 and 2018 activity related to our net self-insured property and casualty reserves as of December 31, 2019. Beginning Balance Expense Payments Ending Balance eginning Balance Expense Payments nung Balance 9 2019 Activity 2018 Activity 66 84 (21) $ (29) $ 54 66 $ 11 Due to the inherent volatility of actuarially determined property and casualty loss estimates, it is reasonably possible that we could experience changes in estimated losses which could be material to our growth in quarterly and annual Net Income. We believe that we have recorded reserves for property and casualty losses at a level which has substantially mitigated the potential negative impact of adverse developments and/or volatility. In the U.S. and in certain other countries, we are also self-insured for healthcare claims and long-term disability for eligible participating employees subject to certain deductibles and limitations. We have 12 3 5 Legal Proceedings We are subject to various claims and contingencies related to lawsuits, real estate, environmental and other matters arising in the normal course of business. An accrual is recorded with respect to claims or contingencies for which a loss is determined to be probable and reasonably estimable. Yum! Restaurants India Private Limited (CYRIPL"), a Yum subsidiary in India, is the subject of a regulatory enforcement action in India (the "Action"). The Action alleges, among other things, that KFC International Holdings, Inc. and Pizza Hut International failed to satisfy certain conditions imposed by the Secretariat for Industrial Approval in 1993 and 1994 when those companies were granted permission for foreign investment and operation in India. The conditions at issue include an alleged minimum investment commitment and store build requirements as well as limitations on the remittance of fees outside of India. The Action originated with a complaint and show cause notice filed in 2009 against YRIPL by the Deputy Director of the Directorate of Enforcement ("DOE") of the Indian Ministry of Finance following an income tax audit for the years 2002 and 2003. The matter was argued at hearing in 2015, but no order was issued. Following a change in the incumbent official holding the position of Special Director of DOE (the "Special Director"), the matter resumed in 2018 and several additional hearings were conducted. On January 29, 2020, the Special Director issued an order imposing a penalty on YRIPL and certain former directors of approximately Indian Rupee 11 billion, or approximately $156 million. Of this amount, approximately $150 million relates to the alleged failure to invest a total of $80 million in India within an initial seven year period. We have been advised by external counsel that the order is flawed and that several options for appeal exist. We deny liability and intend to continue vigorously defending this matter. We do not consider the risk of any significant loss arising from this order to be probable. 2. In your own words, describe what the Insurance Program liability is about. How much liability did Yum! estimate for this contingency at December 31, 2019? 3. Yum! says an accrual is recorded with respect to claims or contingencies when two things happen. List them here. A. B. 4. In your own words, describe what the "Action" matter is about. 5. Even though Yum! was issued an order imposing a $156 million penalty for the "Action" it still feels the likelihood of a liability is not probable. Why