Comfort Inn 2013 Annual Report Download - page 83

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Table of Contents





Balance, Beginning of Year 
$1,793
Additions
—
Accretion 
(632)
Disposals
—
Reclassifications from nonaccretable
yield
—
Balance, End of Year 
$1,161
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 unsecured 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reduced since the amounts forgiven no longer represent probable future economic benefits to the Company.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 collectability 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 expenses in the accompanying consolidated statements of income in the quarter when the note is deemed uncollectible.
As of December 31, 2013 and 2012 , the unamortized balance of these notes totaled $20.6 million and $16.2 million, respectively. The Company
recorded an allowance for credit losses on these forgivable unsecured notes receivable of $1.7 million and $1.6 million at December 31, 2013 and 2012,
respectively. At December 31, 2013 and 2012, the Company did not have any forgivable unsecured notes that were past due. Amortization expense included in
the accompanying consolidated statements of income related to the notes was $4.2 million, $2.8 million and $2.3 million for the years ended December 31,
2013, 2012 and 2011, respectively.
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