Comfort Inn 2011 Annual Report Download - page 56

Table of Contents
The Company may also enter into master development agreements (“MDAs”) with developers that grant limited exclusive development rights and
preferential franchise agreement terms for one-time, non-refundable fees. When these fees are not contingent upon the number of agreements executed under the
MDA, the Company recognizes the up-front fees over the MDA’s contractual life. Fees that are contingent upon the execution of franchise agreements under the
MDA are recognized upon execution of the franchise agreement.
The Company recognizes procurement services revenues from qualified vendors when the services are performed or the product delivered, evidence of an
arrangement exists, the fee is fixed and determinable and collectability is probable. We defer the recognition of procurement 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’s franchise agreements require the payment of certain marketing and reservation system 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 system 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, facilities, legal, accounting, etc., required to carry out marketing
and reservation activities.
The Company records marketing and reservation revenues and expenses on a gross basis since the Company is the primary obligor in the arrangement,
maintains the credit risk, establishes the price and nature of the marketing or reservation services and retains discretion in supplier selection. In addition, net
advances to and repayments from the franchise system for marketing and reservation activities are presented as cash flows from operating activities.
Marketing and reservation system 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 and reservation system 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 system fees receivable is mitigated due to our contractual right to recover these amounts from a large
geographically dispersed group of franchisees. However, our ability to recover these receivables may be adversely impacted by certain factors, including,
among others, declines in the ability of our franchisees to generate revenues at properties they franchise from us, lower than expected franchise system growth
of certain brands and/or lower than expected international franchise system growth. An extended period of occupancy or room rate declines or a decline in the
number of hotel rooms in our franchise system could result in the generation of insufficient funds to recover marketing and reservation advances as well as
meet the ongoing marketing and reservation needs of the overall system.
The Company evaluates the receivable for marketing and reservation costs in excess of cumulative marketing and reservation system fees earned on a
periodic basis for collectability. The Company will record an allowance when, based on current information and events, it is probable that we will be unable to
collect all amounts due for marketing and reservation activities according to the contractual terms of the franchise agreements. The receivables are considered to
be uncollectible if the expected net, undiscounted cash flows from marketing and reservation activities are less than the carrying amount of the asset.
Choice Privileges is our frequent guest incentive marketing program. Choice Privileges enables members to earn points based on their spending levels
with our franchisees 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 or other benefits.
We provide Choice Privileges as a marketing program to franchised hotels and collect a percentage of program members’ room revenue from franchises
to operate the program. Revenues are deferred in an amount equal to the estimated 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 attributable to
outstanding points. Upon redemption of 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.
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