Comfort Inn 2013 Annual Report Download - page 64

Table of Contents
The Company assesses the collectability of its senior notes receivable by comparing the market value of the underlying assets to the carrying value of the
outstanding notes. In addition, the Company evaluates the property’s operating performance, the borrower’s compliance with the terms of the loan and
franchise agreements, and all related personal guarantees that have been provided by the borrower. For subordinated or unsecured receivables, the Company
assesses the property’s operating performance, the subordinated equity available to the Company, the borrower’s compliance with the terms of the loan and
franchise agreements, and the related personal guarantees that have been provided by the borrower.
The Company considers loans to be past due and in default when payments are not made when due. Although the Company considers loans to be in
default if payments are not received on the due date, the Company does not suspend the accrual of interest until those payments are more than 30 days past
due. The Company applies payments received for loans on non-accrual status first to interest and then principal. The Company does not resume interest
accrual until all delinquent payments are received.
Forgivable Notes Receivable
In conjunction with brand and development programs, the Company may provide financing to franchisees for property improvements and other
purposes in the form of forgivable promissory notes which bear interest at market rates. Under these promissory notes, the franchisee promises to repay the
principal balance together with interest upon maturity unless certain conditions are met throughout the term of the promissory note. The principal balance and
related interest are forgiven ratably over the term of the promissory note if the franchisee remains in the system in good standing. If during the term of the
promissory note, the franchisee exits our franchise system or is not operating their franchise in accordance with our quality or credit standards, the Company
may declare a default under the promissory note and commence collection efforts with respect to the full amount of the then-current outstanding principal and
interest.
In accordance with the terms of the promissory notes, the initial principal balance and related interest are ratably reduced over the term of the loan on
each anniversary date until the outstanding amounts are reduced to zero as long as the franchisee remains within the franchise system and operates in
accordance with our quality and brand standards. As a result, the amounts recorded as an asset on the Company's consolidated balance sheet are also ratably
reduced since the amounts forgiven no longer represent probable future economic benefits to the Company. The Company records the reduction of its recorded
assets through amortization and marketing and reservation expense on its consolidated statements of income. Since these forgivable promissory notes
receivable are predominately forgiven ratably over the term of the promissory note rather than repaid, the Company classifies the issuance and collection of
these notes receivable as operating activities in its consolidated statement of cash flows.
The Company fully reserves all defaulted notes in addition to recording a reserve on the estimated uncollectible portion of the remaining notes. For those
notes not in default, the Company calculates an allowance for losses and determines the ultimate collectibility on these forgivable notes based on the historical
default rates for those unsecured notes that are not forgiven but are required to be repaid. The Company records bad debt expense in SG&A and marketing
and reservation system expenses in the accompanying consolidated statements of income in the quarter when the note is deemed uncollectible.
See Note 3 Notes Receivable for additional information.
Stock Compensation.
The Company’s policy is to recognize compensation cost related to share-based payment transactions in the financial statements based on the fair value
of the equity or liability instruments issued. Compensation expense related to the fair value of share-based awards is recognized over the requisite service period
based on an estimate of those awards that will ultimately vest. The Company estimates the share-based compensation expense for awards that will ultimately
vest upon inception of the grant and adjusts the estimate of share-based compensation for those awards with performance and/or service requirements that will
not be satisfied so that compensation cost is recognized only for awards that ultimately vest.
Income Taxes.
Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation
allowance is provided for deferred tax assets if it is more likely than not such assets will be unrealized. Deferred United States income taxes have not been
recorded for temporary differences related to investments in certain foreign subsidiaries and corporate affiliates. The temporary differences consist primarily of
undistributed earnings that are considered permanently reinvested in operations outside the United States. If management’s intentions change in the future,
deferred taxes may need to be provided.
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