Sonic 2009 Annual Report Download - page 25

in excess of the book value of the partnership interest, and the difference is recorded as a reduction of goodwill. If the book value
exceeds the sales price, the excess is recorded as goodwill. In either case, no gain or loss is recognized on the sale of the minority
ownership interest. Goodwill created as a result of the acquisition of minority interests in Partner Drive-Ins is not amortized but is tested
annually for impairment under the provisions of SFAS 142, “Goodwill and Other Intangible Assets.”
Revenue Recognition Related to Franchise Fees and Royalties. Initial franchise fees are recognized in income when we have
substantially performed or satisfied all material services or conditions relating to the sale of the franchise and the fees are nonrefundable.
Area development fees are nonrefundable and are recognized in income on a pro-rata basis when the conditions for revenue recognition
under the individual area 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 Sonic and the franchisee.
Our franchisees are required under the provisions of the license agreements to pay royalties to Sonic each month based on a
percentage of actual net sales. However, the royalty payments and supporting financial statements are not due until the following
month under the terms of our license agreements. As a result, we accrue royalty revenue in the month earned based on estimates of
Franchise Drive-Ins sales. These estimates are based on projections of average unit volume growth at Franchise Drive-Ins collected from
a majority of Franchise Drive-Ins.
Accounting for Stock-Based Compensation. We account for stock-based compensation in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). We estimate the fair value of options granted
using the Black-Scholes option pricing model along with the assumptions shown in Note 13 of Notes to the Consolidated Financial
Statements. The assumptions used in computing the fair value of share-based payments reflect our best estimates, but involve
uncertainties relating to market and other conditions, many of which are outside of our control. We estimate expected volatility based
on historical daily price changes of the company’s stock for a period equal to the current expected term of the options. The expected
option term is the number of years the company estimates that options will be outstanding prior to exercise considering vesting schedules
and our historical exercise patterns. If other assumptions or estimates had been used, the stock-based compensation expense that was
recorded during fiscal year 2009 could have been materially different. Furthermore, if different assumptions are used in future periods,
stock-based compensation expense could be materially impacted.
Income Taxes. We estimate certain components of our provision for income taxes. These estimates include, among other items,
depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as wages paid to certain
employees, effective rates for state and local income taxes and the tax deductibility of certain other items.
We account for uncertain tax positions under the provisions of Financial Accounting Standards Board Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" (“FIN 48”) which sets out criteria for the use of judgment in assessing the timing and
amounts of deductible and taxable items. Although we believe we have adequately accounted for our uncertain tax positions, from time
to time, audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes. We adjust our
uncertain tax positions in light of changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of
limitations, the refinement of an estimate, and penalty and interest accruals associated with uncertain tax positions until they are
resolved. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters.
However, to the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact
the provision for income taxes in the period in which such determination is made.
Our estimates are based on the best available information at the time that we prepare the provision, including legislative and
judicial developments. We generally file our annual income tax returns several months after our fiscal year end. Income tax returns are
subject to audit by federal, state and local governments, typically several years after the returns are filed. These returns could be subject
to material adjustments or differing interpretations of the tax laws. Adjustments to these estimates or returns can result in significant
variability in the tax rate from period to period.
Leases. Certain Partner Drive-Ins lease land and buildings from third parties. Rent expense for operating leases is recognized on a
straight-line basis over the expected lease term, including cancelable option periods when it is deemed to be reasonably assured that
we would incur an economic penalty for not exercising the options. Judgment is required to determine options expected to be exercised.
Certain of our leases have provisions for rent holidays and/or escalations in payments over the base lease term, as well as renewal
periods. The effects of the rent holidays and escalations are reflected in rent expense on a straight-line basis over the expected lease
term, including cancelable option periods when appropriate. The lease term commences on the date when we have the right to control
the use of lease property, which can occur before rent payments are due under the terms of the lease. Contingent rent is generally based
on sales levels and is accrued at the point in time we determine that it is probable that such sales levels will be achieved.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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