Sonic 2003 Annual Report Download - page 36

p.34
Notes to Consolidated Financial Statements
August 31, 2003, 2002 and 2001 (In thousands, except share data)
Ownership Program
The company’s restaurant philosophy stresses an ownership relationship with supervisors and drive-in managers.
Most supervisors and managers of company-owned restaurants own an equity interest in the restaurant, which is financed
by the company. These notes are typically financed for a term of five years, bear interest at market rates, and are secured
by the partner’s equity interest. The company evaluates whether the partner notes are collectible and makes estimates of
bad debts based on the restaurant’s financial performance and collection history with individual partners. If an individual
restaurant’s performance declines, the probability of default by the partners is increased. Supervisors and managers are
not employees of Sonic or of the restaurant in which they have an ownership interest.
The investments made by managers and supervisors in each partnership or limited liability company are accounted
for as minority interests in the financial statements. The ownership agreements contain provisions, which give Sonic the
right, but not the obligation, to purchase the minority interest of the supervisor or manager in a restaurant. The amount
of the investment made by a partner and the amount of the buy-out are based on a number of factors, primarily upon the
restaurant’s financial performance for the preceding 12 months, and is intended to approximate the fair value of a
minority interest in the restaurant. Such payments are accounted for under the purchase method of accounting.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51,” (“FIN 46”). FIN 46 requires the
consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the
entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.
Previously, entities were generally consolidated by an enterprise when a controlling financial interest through ownership of
a majority voting interest in the entity was obtained.
In October 2003, the FASB issued Staff Position No. 46-6, “Effective Date of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities,” (“FSP FIN 46-6”) in which the FASB agreed to defer, for public companies, the
required effective dates to implement FIN 46 for interests held in a variable interest entity (“VIE”) or potential VIE that was
created before February 1, 2003. As a result of FSP FIN 46-6, a public entity need not apply the provisions of FIN 46 to
an interest held in a VIE or potential VIE until the end of the first interim or annual period ending after December 15,
2003, if the VIE was created before February 1, 2003 and the public entity has not issued financial statements reporting
that VIE in accordance with FIN 46, other than in the disclosures required by FIN 46. FIN 46 may be applied prospectively
with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The
company will adopt this Interpretation effective February 29, 2004.
The FASB is currently proposing modifications and issuing FASB Staff Positions (“FSPs”) that change and clarify FIN
46. These modifications and FSPs, when finalized, could impact the company’s analysis of the applicability of FIN 46 to
entities that are franchisees of the company. The company typically has no equity ownership interests in its franchisees
and has not consolidated any of these entities in the company’s financial statements. The company is currently evaluating
the effect of the Interpretation on the accounting for its relationship with certain franchisees and will continue to monitor
developments regarding FIN 46 as they occur.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123.” SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee compensation which includes the
prospective method, modified prospective method and retroactive restatement method. SFAS No. 148 also amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the effect of the method used on reported
results. Adoption of the annual disclosure and voluntary transition requirements of SFAS No. 148 is required for annual
financial statements issued for fiscal years ending after December 15, 2002. Pursuant to the provisions of SFAS No. 123,
the company has elected to continue using the intrinsic value method of accounting for its stock-based employee
compensation plans in accordance with APB 25. See “Stock-Based Compensation” in Note 1 for a further discussion.