Comfort Inn 2013 Annual Report Download - page 63

Table of Contents
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. The Company develops an
estimate of 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.
Valuation of Intangibles and Long-Lived Assets
The Company evaluates the potential impairment of property and equipment and other long-lived assets, including franchise rights and other definite-
lived intangibles, on an annual basis or whenever an event or other circumstances indicates that we may not be able to recover the carrying value of the asset.
Recoverability is measured based on net, undiscounted expected cash flows. Assets are considered to be impaired if the net, undiscounted expected cash flows
are less than the carrying amount of the assets. Impairment charges are recorded based upon the difference between the carrying value and the fair value of the
asset. Significant management judgment is involved in developing these projections, and they include inherent uncertainties. If different projections are used in
the current period, the balances for non-current assets could be 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 evaluates the impairment of goodwill and trademarks with indefinite lives 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. In evaluating these assets for impairment, the Company first
assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we
conclude that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, then no further testing is required. If the
conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step impairment test is performed.
The fair value of the Company's net assets is used to determine if goodwill may be impaired. Indefinite life trademarks are considered to be impaired if the net,
undiscounted expected cash flows associated with the trademark are less than their carrying amount.
Loan Loss Reserves
The Company segregates its notes receivable for the purposes of evaluating allowances for credit losses between two categories: Mezzanine and Other
Notes Receivable and Forgivable Notes Receivable. The Company utilizes the level of security it has in the various notes receivable as its primary credit
quality indicator (i.e. senior, subordinated or unsecured) when determining the appropriate allowances for uncollectible loans within these categories.
Mezzanine and Other Notes Receivables
The Company has provided financing to franchisees in support of the development of properties in strategic markets. The Company expects the owners
to repay the loans in accordance with the loan agreements, or earlier as the hotels mature and capital markets permit. The Company estimates the collectability
and records an allowance for loss on its mezzanine and other notes receivable when recording the receivables in the Company’s financial statements. These
estimates are updated quarterly based on available information.
The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect
all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual
interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. The Company measures loan
impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the
collateral. For impaired loans, the Company establishes a specific impairment reserve for the difference between the recorded investment in the loan and the
present value of the expected future cash flows or the estimated fair value of the collateral. The Company applies its loan impairment policy individually to all
mezzanine and other notes receivable in the portfolio and does not aggregate loans for the purpose of applying such policy. For impaired loans, the Company
recognizes interest income on a cash basis. If it is likely that a loan will not be collected based on financial or other business indicators it is the Company’s
policy to charge off these loans to SG&A expenses in the accompanying consolidated statements of income in the quarter when it is deemed uncollectible.
Recoveries of impaired loans are recorded as a reduction of SG&A expenses in the quarter received.
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