Comfort Inn 2014 Annual Report Download - page 75

Table of Contents
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, operating a guest loyalty program, media advertising, central
reservation systems and technology services. The Company is contractually obligated to expend the marketing and reservation system revenue it collects
from franchisees in accordance with the franchise agreements; as such, no income or loss to the Company is generated. In accordance with the franchise
agreements, the Company includes in marketing and reservation expenses an allocation of costs for certain activities, such as human resources, facilities,
legal, accounting, etc., 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 revenues 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 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 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
collect all 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. The Company believes that any credit risk associated with cumulative cost advances for marketing and reservation system activities is mitigated
due to the contractual right to recover these amounts from a large geographically dispersed group of franchisees.
Choice Privileges is the Company’s frequent guest incentive marketing program. Choice Privileges enables members to earn points based on their
spending levels with franchisees and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by credit card companies.
The points, which the Company accumulates and tracks on the members’ behalf, may be redeemed for free accommodations or other benefits.
The Company provides Choice Privileges as a marketing program to franchised hotels and collects 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.
Accounts Receivable and Credit Risk
Accounts receivable consist primarily of franchise and related fees due from hotel franchises and are recorded at the invoiced amount. The allowance
for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable. The Company determines
the allowance considering historical write-off experience and a review of aged receivable balances. However, the Company considers its credit risk associated
with trade receivables to be partially mitigated due to the dispersion of these receivables across a large number of geographically diverse franchisees.
The Company records bad debt expense in SG&A and marketing and reservation expenses in the accompanying consolidated statements of income
based on its assessment of the ultimate realizability of trade receivables considering historical collection experience and the economic environment. When
the Company determines that an account is not collectible, the account is written-off to the associated allowance for doubtful accounts.
Advertising Costs
The Company expenses advertising costs as the advertising occurs. Advertising expense was $93.7 million, $84.7 million and $79.7 million for the
years ended December 31, 2014, 2013 and 2012, respectively. Prepaid advertising at December 31,
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