Comfort Inn 2005 Annual Report Download - page 36

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
flows, discounted at the loan’s effective interest rate. The Company recorded $0.2 million of impairment charges
related to notes receivable during the year ended December 31, 2005 and no amounts in the prior two years
ended December 31, 2004.
Deferred Financing Costs.
Debt financing costs are deferred and amortized, using the effective interest method, over the term of the
related debt. As of December 31, 2005 and 2004, unamortized deferred financing costs were $1.2 million and
$1.4 million, respectively, and are included in other non-current assets in the accompanying consolidated balance
sheets.
In July 2004, the Company entered into a $265 million senior unsecured revolving credit facility
(“Revolver”). The proceeds were used to refinance and terminate the Company’s existing senior credit facility
(“Old Credit Facility”). The Company accounted for the refinancing of the Old Credit Facility in accordance with
Emerging Issues Task Force (“EITF”) Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of
Debt Instruments,” and EITF No. 98-14, “Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt
Arrangements.” Pursuant to these pronouncements, the Company recorded a loss on extinguishment of debt of
approximately $0.7 million during the year ended December 31, 2004.
Investments.
The Company accounts for its investment in Choice Hotels Canada, Inc. (“CHC”) and Choice Hospitality
(India) Private Ltd (“CHN”) in accordance with Accounting Principles Board Opinion (“APB”) No. 18, “The
Equity Method of Accounting for Investments in Common Stock.” The Company accounted for its investment in
the common stock of Choice Hotels Scandinavia (“CHS”) in accordance with SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities,” and SFAS No. 130, “Reporting Comprehensive Income”
until the sale of this investment in August 2005.
Derivatives.
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” establishes accounting and
reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 requires the recognition of the fair value of derivatives in the balance sheet,
with changes in the fair value recognized either in earnings or as a component of other comprehensive income
dependent upon the nature of the derivative. SFAS No. 133 also states that any deferred gain on previous hedging
activity does not meet the definition of a liability, due to a lack of expected future cash flows and therefore
should be included in comprehensive income. As of December 31, 2005 and 2004 the Company had no
derivative financial instruments.
Stock-based compensation.
The Company has stock-based employee compensation plans, which are described more fully in Note 16.
Prior to January 1, 2003, the Company accounted for those plans under the recognition and measurement
provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No
stock-based employee compensation cost was reflected in 2002 or prior years’ net income related to the grant of
stock options, as all options granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted, in accordance
with the prospective method prescribed by SFAS No. 148, “Accounting for Stock-Based Compensation—
Transition and Disclosure,” the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based
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