Comfort Inn 2013 Annual Report Download - page 62

Table of Contents
hotel rooms of each franchisee. Our estimate of the allowance for uncollectible royalty fees is charged to SG&A expense and our estimate of the allowance for
uncollectible marketing and reservation system fees is charged to marketing and reservation expenses.
Initial franchise and relicensing fees are recognized, in most instances, in the period the related franchise agreement is executed because the initial
franchise and relicensing fees are non-refundable and the Company is not required to provide initial services to the franchisee prior to hotel opening. We defer
the initial franchise and relicensing fee revenue related to franchise agreements which include incentives until the incentive criteria are met or the agreement is
terminated, whichever occurs first.
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 pro-rata 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 net 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 and accounting, required to carry out marketing and reservation
activities.
The Company records marketing and reservation system 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 recoveries 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 recorded as a liability in the Company's balance sheet and are carried over to
the next fiscal year and expended in accordance with the franchise agreements. Shortfall amounts are recorded as an asset in the Company's balance sheet,
with a corresponding reduction in costs, and are similarly recovered in subsequent years. Under the terms of the franchise agreements, the Company may
advance capital and incur costs 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 cumulative cost advances for marketing and reservation system activities 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 advances 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. 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 recoverability of marketing and reservation costs incurred in excess of cumulative marketing and reservation system
revenues earned on a periodic basis. The Company will record a reserve when, based on current information and events, it is probable that it will be unable to
recover the cumulative amounts advanced for marketing and reservation activities according to the contractual terms of the franchise agreements. These
advances are considered to be unrecoverable 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.
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