Comfort Inn 2014 Annual Report Download - page 60

Table of Contents
$4.5 million and accrued and unpaid interest, as well as any unpaid expenses incurred by the lender. The limited guaranty shall remain in effect until the
maximum amount guaranteed by the Company is paid in full. In addition to the limited guaranty, the Company entered into an agreement in which the
Company guarantees the completion of the construction of the hotel and an environmental indemnity agreement which indemnifies the lending institution
from and against any damages relating to or arising out of possible environmental contamination issues with regards to the property.
On November 15, 2013, the Company entered into a limited payment guaranty with regards to a VIE's $46.2 million bank loan for the construction of a hotel
franchised under one of the Company's brands in the United States. Under the terms of the limited guaranty, the Company has agreed to unconditionally
guarantee and become surety for the full and timely payment of the guaranteed outstanding principal balance, as well as any unpaid expenses incurred by the
lender. The guarantee is limited to 25% of the outstanding principal balance of the $46.2 million loan due at any time for a maximum exposure of $11.6
million. The limited guaranty shall remain in effect until the maximum amount guaranteed by the Company is repaid in full. The maturity date of the VIE's
loan is May 2017.
The Company believes the likelihood of having to perform under the aforementioned limited payment guarantees is remote at December 31, 2014 and
December 31, 2013.
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Our accounting policies comply with principles generally accepted in the United States. We have described below those policies that we believe are
critical and require the use of complex judgment or significant estimates in their application. Additional discussion of these policies is included in Note 1 to
our consolidated financial statements.
Revenue Recognition.
We recognize continuing franchise fees, including royalty, marketing and reservations system fees, when earned and realizable from our franchisees.
Franchise fees are typically based on a percentage of gross room revenues or the number of hotel rooms of each franchisee. Franchise fees based on a
percentage of gross room revenues are recognized in the same period that the underlying gross room revenues are earned by our franchisees. 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 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 or determinable and collectability is reasonably assured. 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 or utilized to repay previous advances. Marketing and reservation expenses
incurred in excess of revenues 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
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