Comfort Inn 2002 Annual Report Download - page 28

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
accordance with the franchise agreements; as such, no income or loss to the Company is generated. As described
below, the Company changed its presentation of marketing and reservation revenues and expenses to a gross
basis during the fourth quarter of 2001.
Presentation of Marketing and Reservation Revenues and Expenses.
The Company revised its presentation of marketing and reservation revenues during the fourth quarter of
2001 to comply with Emerging Issues Task Force (“EITF”) Issue No. 99-19 “Reporting Revenue Gross as a
Principal versus Net as an Agent.” The Company had previously presented these revenues net of related expenses
on its consolidated statements of income. EITF 99-19 requires that these revenues be recorded gross and
accordingly, the Company has revised its financial statement presentation for all periods presented. In addition,
net advances from and repayments related to marketing and reservation activities have been reclassified to
present these activities as cash flows from operating activities for all periods presented. These revisions had no
effect on the net income or cash flows reported during the periods revised.
Credit Risk and Exposure.
Substantially all of the Company’s trade receivables as well as the receivable for marketing and reservation
fees are due from hotel franchisees. However, the Company considers its credit risk associated with trade
receivables and the marketing and reservation fees minimal due to the dispersion of the Company’s receivables
across a large number of geographically diverse franchisees.
The Company records bad debt expense which is included in selling, general and administrative expenses in
the accompanying consolidated statements of income based on its assessment of the ultimate realizability of
receivables considering historical collection experience and the economic environment. When the Company
determines that an account is not collectible, the account is written-off to the associated allowance for doubtful
accounts. Bad debts have historically been minimal.
Advertising Costs.
The Company expenses advertising costs as the advertising occurs in accordance with American Institute of
Certified Public Accountants, Statement of Position 93-7, “Reporting on Advertising Costs”. Advertising
expense was $41.8 million, $55.1 million and $48.4 million for the years ended December 31, 2002, 2001, and
2000, respectively. The Company includes advertising costs in marketing and reservation expenses on the
accompanying consolidated statements of income.
Cash and Cash Equivalents.
The Company considers all highly liquid investments purchased with a maturity of three months or less at
the date of purchase to be cash equivalents. As of December 31, 2002 and 2001, $5.0 million and $8.6 million,
respectively, of book overdrafts representing outstanding checks in excess of funds on deposit have been
classified in accounts payable in the accompanying consolidated balance sheets.
Capitalization Policies.
Property and equipment are recorded at cost and depreciated using the straight-line method over the
estimated useful lives of the assets. Major renovations, replacements and interest incurred during construction are
capitalized. Upon sale or retirement of property, the cost and related accumulated depreciation are eliminated
from the accounts and the related gain or loss is recognized in the accompanying consolidated statements of
income. Maintenance, repairs and minor replacements are charged to expense as incurred.
F-20