Sonic 2013 Annual Report Download - page 38

The Company grants incentive stock options (“ISOs”), non-qualified stock options (“NQs”) and restricted stock
units (“RSUs”). For grants of NQs and RSUs, the Company expects to recognize a tax benefit upon exercise of the
option or vesting of the RSU. As a result, a tax benefit is recognized on the related stock-based compensation
expense for these types of awards. For grants of ISOs, a tax benefit only results if the option holder has a
disqualifying disposition. As a result of the limitation on the tax benefit for ISOs, the tax benefit for stock-based
compensation will generally be less than the Company’s overall tax rate and will vary depending on the timing of
employees’ exercises and sales of stock. For additional information on stock-based compensation see note 13 -
Stockholders’ Equity.
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 from 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 NQs, the vesting of RSUs, and disqualifying dispositions of ISOs.
The threshold for recognizing the financial statement effects of a tax position is 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 to be realized upon ultimate settlement with a taxing authority. Interest and penalties related to
unrecognized tax benefits are included in income tax expense.
Additional information regarding the Company’s unrecognized tax benefits is provided in note 12 - Income Taxes.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business entity during a period from transactions
and other events and circumstances from non-owner sources and is reflected in the Consolidated Statements of
Income and Comprehensive Income, based on ASU No. 2011-05, “Comprehensive Income: Presentation of
Comprehensive Income,” adopted during fiscal year 2013.
In August 2006, the Company entered into a forward starting swap agreement with a financial institution to
hedge part of the exposure to changing interest rates until new financing was closed. The forward starting swap
was designated as a cash flow hedge, and was subsequently settled in conjunction with the closing of the
Company’s 2006 securitized debt transaction, as planned. The loss resulting from settlement was recorded net of
tax in accumulated other comprehensive income and amortized to interest expense over the expected term of the
debt. In conjunction with the Company’s May 2011 refinancing discussed in note 10 – Debt, the Company’s deferred
hedging loss was reclassified from accumulated other comprehensive income into earnings during third quarter
fiscal year 2011.
Fair Value Measurements
The Company’s financial assets and liabilities consist of cash and cash equivalents, accounts and notes
receivable, accounts payable and long-term debt. The fair value of cash and cash equivalents, accounts receivable,
and accounts payable approximates their carrying amounts due to the short term nature of these assets and liabilities.
The following methods and assumptions were used by the Company in estimating fair values of its financial
instruments:
•Notes receivable - As of August 31, 2013 and 2012, the carrying amounts of notes receivable (both current
and non-current) approximate fair value due to the effect of the related allowance for doubtful accounts.
•Long-term debt - The Company prepares a discounted cash flow analysis for its fixed rate borrowings to estimate
fair value each quarter. This analysis uses Level 2 inputs from market information available for public debt
transactions for companies with ratings that are similar to the Company’s ratings and from information gathered
from brokers who trade in the Company’s notes. The fair value estimate required significant assumptions by
management. Management believes this fair value is a reasonable estimate. For more information regarding
the Company’s long-term debt, see note 10 - Debt and note 11 - Fair Value of Financial Instruments.
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Notes to Consolidated Financial Statements
August 31, 2013, 2012 and 2011 (In thousands, except per share data)