Sonic 2009 Annual Report Download - page 35

Notes to Consolidated Financial Statements
August 31, 2009, 2008 and 2007 (In thousands, except per share data)
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes
but do not affect earnings. These benefits are principally generated from employee exercises of non-qualified stock options and
disqualifying dispositions of incentive stock options.
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN
48”) prescribes a threshold for recognizing the financial statement effects of a tax position when it is more likely than not, based on the
technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and
subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with
a taxing authority. Liabilities for unrecognized tax benefits related to such tax positions are included in other long-term liabilities unless
the tax position is expected to be settled within the upcoming year, in which case the liabilities are included in accrued expenses and
other current liabilities. Interest and penalties related to unrecognized tax benefits are included in income tax expense.
Additional information regarding the company’s unrecognized tax benefits, including changes in such amounts during fiscal years
2009 and 2008, is provided in Note 12.
Disclosures About Fair Value of Financial Instruments
Effective September 1, 2008, we implemented Financial Accounting Standards No. 157, “Fair Value Measurement” (“FAS 157”),
which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. That
framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest
priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FAS 157 are described below:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment, credit risk, etc.).
Level 3—Significant unobservable inputs.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that
is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize
the use of unobservable inputs.
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of August 31, 2009 by FAS
157 valuation hierarchy:
Level 1 Level 2 Level 3 Carrying Value
Cash equivalents $ 137,597 $ – $ –$137,597
Restricted cash (current) 24,900 ––24,900
Restricted cash (noncurrent) 10,468 ––10,468
Total assets at fair value $ 172,965 $–$–$172,965
New Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other
items at fair value. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent
reporting date. SFAS 159 was effective for our fiscal year beginning September 1, 2008. The adoption of SFAS 159 did not have a material
impact on our financial statements.
In December 2007, the FASB issued FASB Statement No. 141(revised 2007),“Business Combinations” (“SFAS 141(R)”). This standard
retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations
and for an acquirer to be identified for each business combination. SFAS 141(R) requires an acquirer to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values at the acquisition date. Costs incurred by the
acquirer to effect the acquisition are not allocated to the assets acquired or liabilities assumed, but are recognized separately. SFAS 141(R)
is effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting
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