Comfort Inn 2004 Annual Report Download - page 30

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Marketing and Reservation Revenues and Expenses.
The Company’s franchise agreements require the payment of franchise fees, including marketing and
reservation fees, which are used exclusively by the Company for expenses associated with providing franchise
services such as national marketing, media advertising, central reservation systems and technology services. The
Company is contractually obligated to expend the marketing and reservation fees it collects from franchisees in
accordance with the franchise agreements; as such, no income or loss to the Company is generated. In accordance
with our contracts, we include in marketing and reservation expenses an allocation of costs for certain activities,
such as human resources, legal, accounting, etc., required to carry out marketing and reservation activities.
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 from and
repayments related to marketing and reservation activities are presented as cash flows from operating activities.
Choice Privileges is our frequent guest loyalty 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, which we accumulate and track
on the members’ behalf, may be redeemed for free accommodations, airline frequent flier program miles or other
benefits. Points cannot be redeemed for cash.
We provide Choice Privileges as a marketing program to participating hotels. The cost of operating the
program, including the estimated cost of award redemptions, are charged to the participating hotels by collecting
a percentage of program members’ room revenue from participating franchises. Revenues are deferred and
included within accrued expenses and other in the accompanying consolidated balance sheet equal to the
estimated fair value of the future redemption obligation. A third-party actuary estimates redemption rates and
point values using various actuarial methods. These judgmental factors determine the required liability for
unredeemed 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.
Accounts Receivable and Credit Risk.
Accounts receivable consist primarily of franchise and related fees due from hotel franchises and are
recorded at the invoiced amount. The allowance for doubtful accounts is our best estimate of the amount of
probable credit losses in our existing accounts receivable. We determine the allowance considering historical
write-off experience and review of aged receivable balances. However, the Company considers its credit risk
associated with trade receivables and the receivable for marketing and reservation fees to be partially mitigated
due to the dispersion of these receivables across a large number of geographically diverse franchisees.
The Company records bad debt expense in selling, general and administrative expenses and marketing and
reservation expenses in the accompanying consolidated statements of income based on its assessment of the
ultimate realizability of receivables considering historical collection experience and the economic environment.
When the Company determines that an account is not collectible, the account is written-off to the associated
allowance for doubtful accounts.
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