Sonic 2014 Annual Report Download - page 32

Inventories
Inventories consist principally of food and supplies that are carried at the lower of cost (first-in, first-out basis) or market.
Property, Equipment and Capital Leases
Property and equipment are recorded at cost, and leased assets under capital leases are recorded at the present value of
future minimum lease payments. Depreciation of property and equipment and amortization of capital leases are computed by the
straight-line method over the estimated useful lives or the lease term, including cancelable option periods when appropriate, and
are combined for presentation in the financial statements.
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 of the related drive-in.
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 goodwill at least
annually for impairment using the fair value approach on a reporting unit basis.
Since the Company is one reporting unit in fiscal year 2014, potential goodwill impairment is evaluated by comparing the
fair value of the Company to its carrying value. The fair value of the Company is determined using a market approach. If the
carrying value of the Company exceeds fair value, a comparison of the fair value of goodwill against the carrying value of goodwill
is made to determine whether goodwill has been impaired. During the fourth quarter of fiscal year 2014, the annual assessment
of recoverability of goodwill was performed and no impairment was indicated. Prior to fiscal year 2014, the Company had two
reporting units. In comparing the carrying value and the fair value of the reporting units, the company estimated 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. During the fourth quarter of fiscal 2013, the annual assessment of recoverability of goodwill
was performed and no impairment was indicated.
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.
Revenue Recognition, Franchise Fees and Royalties
Revenue from Company Drive-In sales is recognized when food and beverage products are sold. Company Drive-In sales are
presented net of sales tax and other sales-related taxes.
The Company records a liability in the period in which a gift card is sold. The gift cards do not have expiration dates. As gift
cards are redeemed, the liability is reduced with revenue recognized on redemptions at Company Drive-Ins. Breakage is the
Notes to Consolidated Financial Statements
August 31, 2014, 2013 and 2012 (In thousands, except per share data)
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