Sonic 2003 Annual Report Download - page 34

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Notes to Consolidated Financial Statements
August 31, 2003, 2002 and 2001 (In thousands, except share data)
Assets held for disposal are carried at the lower of depreciated cost or fair value less cost to sell. Fair values are
estimated based upon appraisals or independent assessments of the assets’ estimated sales values. During the period in
which assets are being held for disposal, depreciation and amortization of such assets are not recognized.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” SFAS No. 144 requires that an impairment loss be recognized only if the carrying amount
of a long-lived asset is not recoverable from its undiscounted cash flows and that the measurement of any impairment loss
be the difference between the carrying amount and the fair value of the asset. The company adopted the Statement
effective September 1, 2002, which did not result in a material impact on its consolidated financial position or results
of operation.
Goodwill and Other Intangible Assets
The company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective September 1, 2001.
Statement No. 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Intangible
assets with lives restricted by contractual, legal, or other means will continue to be amortized over their useful lives.
Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be impaired. SFAS No. 142 requires a two-step process
for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether
an indication of impairment exists. If an impairment is indicated, then the fair value of the reporting unit’s goodwill is
determined by allocating the unit’s fair value to its assets and liabilities (including any unrecognized intangible assets) as if
the reporting unit had been acquired in a business combination. The amount of impairment for goodwill and other
intangible assets is measured as the excess of its carrying value over its fair value. No such impairment losses were
recorded upon the initial adoption of SFAS No. 142. Prior to the adoption of SFAS No. 142, goodwill was being
amortized on a straight-line basis over periods not exceeding 40 years.
The company’s intangible assets subject to amortization under SFAS No. 142 consist primarily of acquired franchise
agreements, franchise fees, and other intangibles. Amortization expense is calculated using the straight-line method over
the expected period of benefit, not exceeding 15 years. The company’s trademarks and trade names were deemed to have
indefinite useful lives and are not subject to amortization. See Note 5 for additional disclosures related to goodwill and
other intangibles.
Franchise Fees and Royalties
Initial franchise fees are nonrefundable and are recognized in income when all material services or conditions relating
to the sale of the franchise have been substantially performed or satisfied by the company. Area development fees are
nonrefundable and are recognized in income on a pro rata basis when the conditions for revenue recognition under the
individual development agreements are met. Both initial franchise fees and area development fees are generally recognized
upon the opening of a franchise drive-in or upon termination of the agreement between the company and the franchisee.
The company’s franchisees are required under the provisions of the license agreements to pay the company royalties
each month based on a percentage of actual net royalty sales. However, the royalty payments and supporting financial
statements are not due until the 20th of the following month. As a result, the company accrues royalty revenue in the
month earned based on estimates of franchise store sales. These estimates are based on actual sales at company-owned
stores and projections of average unit volume growth at franchise stores.
Advertising Costs
Costs incurred in connection with advertising and promotion of the company’s products are expensed as incurred.
Such costs amounted to $19,665, $16,544, and $13,283 for fiscal years 2003, 2002 and 2001, respectively.
Under the company’s license agreements, each drive-in, either company-owned or franchise, must contribute a
minimum percentage of revenues to a national media production fund (Sonic Advertising Fund) and spend an additional
minimum percentage of gross revenues on local advertising, either directly or through company-required participation in
advertising cooperatives. A portion of the local advertising contributions is redistributed to a System Marketing Fund,
which purchases advertising on national cable and broadcast networks and other national media and sponsorship
opportunities. As stated in the terms of existing license agreements, these funds do not constitute assets of the company