Sonic 2013 Annual Report Download - page 36

Accounting for Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. Assets are grouped and evaluated for impairment at the lowest level
for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets,
which generally represents the individual drive-in. The Company’s primary test for an indicator of potential
impairment is operating losses. If an indication of impairment is determined to be present, the Company estimates
the future cash flows expected to be generated from the use of the asset and its eventual disposal. If the sum of
undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. The
impairment loss is measured by comparing the fair value of the asset to its carrying amount. Fair value is typically
determined to be the value of the land, since drive-in buildings and improvements are single-purpose assets and have
little value to market participants. The equipment associated with a store can be easily relocated to another store,
and therefore is not adjusted.
Surplus property assets are carried at the lower of depreciated cost or fair value less cost to sell. The majority
of the value in surplus property is land. Fair values are estimated based upon management’s assessment as well
as independent market value assessments of the assets’ estimated sales values.
Goodwill and Other Intangible Assets
Goodwill is determined based on acquisition purchase price in excess of the fair value of identified assets.
Intangible assets with lives restricted by contractual, legal, or other means are amortized over their useful lives.
The Company tests all goodwill and other intangible assets not subject to amortization at least annually for
impairment using the fair value approach on a reporting unit basis. The Company’s reporting units are defined as
Company Drive-Ins and Franchise Operations (see additional information regarding the Company’s reporting units
in note 14 - Segment Information). The Company tests for impairment using historical cash flows and other relevant
facts and circumstances as the primary basis for its estimates of future cash flows. This process requires the use
of estimates and assumptions, which are subject to a high degree of judgment. These impairment tests require the
Company to estimate fair values of its drive-ins by making assumptions regarding future cash flows and other factors.
The Company assesses the recoverability of goodwill and other intangible assets related to the brand and drive-
ins at least annually and more frequently if events or changes in circumstances occur indicating that the carrying
amount of the asset may not be recoverable or as a result of allocating goodwill to Company Drive-Ins that are sold.
During fiscal year 2013, the Company adopted Accounting Standards Update (“ASU”) No. 2011-08 “Testing Goodwill
for Impairment.” Under this pronouncement the Company could have assessed qualitative factors to determine if
it was necessary to perform the two-step goodwill impairment test. The Company did not utilize this shortcut
method, but chose to continue to apply the two-step impairment approach for fiscal year 2013. The Company
estimates fair value based on a comparison of two approaches: an income approach, using the discounted cash flow
method, and a market approach, using the guideline public company method. The discounted estimates of future
cash flows include significant management assumptions such as revenue growth rates, operating margins, capital
expenditures, weighted average cost of capital, and future economic and market conditions. In addition, the market
approach includes significant assumptions such as the use of projected cash flow and revenue multiples derived from
a comparable set of public companies as well as a control premium based on recent market transactions. These
assumptions are significant factors in calculating the value of the reporting units and can be affected by changes
in consumer demand, commodity pricing, labor and other operating costs, the Company’s cost of capital and
changes in guideline public company market multiples. If the carrying value of the reporting unit exceeds fair value,
goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of the
goodwill and the “implied” fair value, which is calculated as if the reporting unit had just been acquired and
accounted for as a business combination.
The Company’s intangible assets subject to amortization consist primarily of acquired franchise agreements,
intellectual property and other intangibles. Amortization expense is calculated using the straight-line method over
the asset’s expected useful life. See note 5 - Goodwill and Other Intangibles for additional related disclosures.
Refranchising and Closure of Company Drive-Ins
Gains and losses from the sale or closure of Company Drive-Ins are recorded as “Other operating (income)
expense, net” on the Consolidated Statements of Income and Comprehensive Income.
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Notes to Consolidated Financial Statements
August 31, 2013, 2012 and 2011 (In thousands, except per share data)