Comfort Inn 2003 Annual Report Download - page 25

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company Information and Significant Accounting Policies
Company Information.
Choice Hotels International, Inc. and subsidiaries (together “the Company”) is in the business of hotel
franchising. As of December 31, 2003, the Company had franchise agreements representing 4,810 open hotels
and 491 hotels under development in 44 countries and territories under the brand names: Comfort Inn, Comfort
Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and Flag Hotels.
Principles of Consolidation.
The consolidated financial statements include the accounts of Choice Hotels International, Inc. and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
On July 1, 2002, the Company acquired a controlling interest in Flag Choice Hotels (“Flag”). Flag, based in
Melbourne, Australia, is a franchisor of hotels in Australia, Papua New Guinea, Fiji and New Zealand. The
results of Flag have been consolidated since that date.
Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year
presentation.
Revenue Recognition.
The Company accounts for initial and continuing franchise fees in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 45, “Accounting for Franchise Fee Revenue.” The Company enters into
franchise agreements to provide franchisees with various marketing services, a centralized reservation system
and limited non-exclusive rights to utilize the Company’s registered tradenames and trademarks. These
agreements typically have an initial term of twenty years with provisions permitting franchisees to terminate after
five, ten, or fifteen years under certain circumstances. In most instances, initial franchise fees are recognized
upon execution of the franchise agreement because the initial franchise fee is non-refundable and the Company
has no continuing obligations related to the franchisee. The initial franchise fees related to executed franchise
agreements which include incentives, such as future potential rebates, are deferred and recognized when the
incentive criteria are met or the agreement is terminated, whichever occurs first.
Royalty fees, which are typically based on a percentage of gross room revenues of each franchisee, are
recorded when earned and receivable from the franchisee. Reserves for uncollectible royalty fees are charged to
bad debt expense and are included in selling, general and administrative expenses in the accompanying
consolidated statements of income.
The Company generates partner services revenues from endorsed vendors. Partner services revenues are
generally earned based on the level of goods or services purchased from endorsed vendors by hotel owners and
hotel guests who stay in the Company’s franchised hotels. The Company accounts for partner services revenues
in accordance with Staff Accounting Bulletin No. 104, (“SAB 104”) “Revenue Recognition.” SAB 104 provides
guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company
recognizes partner services revenues when the services are performed or the product delivered, evidence of an
arrangement exists, the fee is fixed and determinable and collectibility is probable. SAB 104 requires the
Company to defer the recognition of partner services revenues related to upfront fees. Such upfront fees are
generally recognized over a period corresponding to the Company’s estimate of the life of the arrangement.
Marketing and Reservation Revenues and Expenses.
The Company’s franchise agreements require the payment of franchise fees, including marketing and
reservation fees, which are used exclusively by the Company for expenses associated with providing franchise
F-18