Comfort Inn 2014 Annual Report Download - page 61

Table of Contents
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. The Company believes that any credit risk associated with 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
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. If these factors exist it 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.
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, whenever an event or other circumstances indicates that the Company may not be able to recover the carrying value of the asset. When
indicators of impairment are present, recoverability is assessed based on net, undiscounted expected cash flows. If the net, undiscounted expected cash flows
are less than the carrying amount of the assets, an impairment charge is recorded for the excess of the carrying value over the fair value of the asset. We
estimate the fair value of intangibles and long lived assets primarily using undiscounted cash flow analysis. Significant management judgment is involved in
evaluating indicators of impairment and developing any required projections to test for recoverability or estimate the fair value of an asset. 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 the Company may not be able to recover the carrying amount of the asset. In evaluating these assets for impairment, the Company
may elect to first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit or the indefinite lived
intangible asset is less than its carrying amount. If the conclusion is that it is not more likely than not that the fair value of the asset 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 the asset is less than its carrying value, then a
two-step impairment test is performed for goodwill. The Company may elect to forego the qualitative assessment and move directly to the two-step
impairment test for goodwill and the the fair value determination for indefinite-lived intangibles. The Company determines the fair value of its reporting
units and indefinite-lived intangibles using income and market methods.
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.
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