Comfort Inn 2004 Annual Report Download - page 20

exists, the fee is fixed and determinable and collectibility is probable. We defer the recognition of partner
services revenues related to certain upfront fees and recognize them over a period corresponding to the
Company’s estimate of the life of the arrangement.
Marketing and Reservation Revenues and Expenses.
The Company records marketing and reservation revenues and expenses in accordance with Emerging
Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,”
which requires that these revenues and expenses be recorded gross. In addition, net advances to and repayments
from the franchise system for marketing and reservation activities are presented as cash flows from operating
activities.
Reservation fees and marketing fees not expended in the current year are carried over to the next fiscal year
and expended in accordance with the franchise agreements. Shortfall amounts are similarly recovered in
subsequent years. Cumulative excess or shortfall amounts from the operation of these programs are recorded as a
marketing or reservation fee payable or receivable. Under the terms of the franchise agreements, the Company
may advance capital as necessary for marketing and reservation activities and recover such advances through
future fees. Our current assessment is that the credit risk associated with the marketing and reservation fee
receivable is mitigated due to our contractual right to recover these amounts from a large geographically
dispersed group of franchisees.
Choice Privileges is our frequent guest incentive marketing program. Choice Privileges enables members to
earn points based on their spending levels at participating brands and, to a lesser degree, through participation in
affiliated partners’ programs, such as those offered by credit card companies. The points may be redeemed for
free accommodations or other benefits. Points cannot be redeemed for cash.
The Company collects a percentage of program members’ room revenue from participating franchises.
Revenues are deferred equal to the fair value of the future redemption obligation. A third-party actuary estimates
the eventual redemption rates and point values using various actuarial methods. These judgmental factors
determine the required liability for outstanding points. Upon redemption of the points, the Company recognizes
the previously deferred revenue as well as the corresponding expense relating to the cost of the awards redeemed.
Revenues in excess of the estimated future redemption obligation are recognized when earned to reimburse the
Company for costs incurred to operate the program, including administrative costs, marketing, promotion and
performing member services. Costs to operate the program, excluding estimated redemption values, are expensed
when incurred.
Impairment Policy.
We evaluate the fair value of goodwill to assess potential impairments on an annual basis, or during the year
if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset.
We evaluate impairment of goodwill by comparing the fair value of our net assets with the carrying amount of
goodwill. We evaluate the potential impairment of property and equipment and other long-lived assets, including
franchise rights whenever an event or other circumstance indicates that we may not be able to recover the
carrying value of the asset. Our evaluation is based upon future cash flow projections. These projections reflect
management’s best assumptions and estimates. Significant management judgment is involved in developing
these projections, and they include inherent uncertainties. If different projections had been used in the current
period, the balances for non-current assets could have been materially impacted. Furthermore, if management
uses different projections or if different conditions occur in future periods, future-operating results could be
materially impacted. The Company reviews outstanding notes receivable on a periodic basis to ensure that each
is fully collectible by reviewing the financial condition of its debtors. If the Company concludes that it will be
unable to collect all amounts due, the Company will record an impairment charge.
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