Comfort Inn 2003 Annual Report Download - page 46

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
warranties. Such guarantees or indemnifications are granted under various agreements, including those governing
(i) purchases or sales of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to
credit facilities, (v) issuances of debt or equity securities, and (vi) other operating agreements. The guarantees or
indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase
agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in
credit facility arrangements, and (v) underwriters in debt or equity security issuances. In addition, these parties
are also indemnified against any third party claim resulting from the transaction that is contemplated in the
underlying agreement. While some of these guarantees extend only for the duration of the underlying agreement,
many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal
statute of limitations). There are no specific limitations on the maximum potential amount of future payments
that the Company could be required to make under these guarantees, nor is the Company able to develop an
estimate of the maximum potential amount of future payments to be made under these guarantees as the
triggering events are not subject to predictability. With respect to certain of the aforementioned guarantees, such
as indemnifications of landlords against third party claims for the use of real estate property leased by the
Company, the Company maintains insurance coverage that mitigates any potential payments to be made.
21. Fair Value of Financial Instruments
The balance sheet carrying amount of cash and cash equivalents and receivables approximates fair value due
to the short term nature of these items. Long-term debt consists of bank loans and senior notes. Interest rates on
the Company’s bank loans adjust frequently based on current market rates; accordingly, the carrying amount of
the Company’s bank loans approximates fair value. The $100 million unsecured senior notes have an
approximate fair value at December 31, 2003 and 2002 of $111.7 million and $102.5 million, respectively, based
on quoted market prices. The New Note from Sunburst was repaid to the Company in December 2003. Its
estimated fair value at December 31, 2002 was $42.7 million.
22. Impact of Recently Issued Accounting Standards
On January 1, 2003, the Company adopted FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” in its
entirety. Such Interpretation elaborates on the disclosures to be made by a guarantor about its obligations under
certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of any
guarantee issued or modified after December 31, 2002, a liability for the fair value of the obligation undertaken
in issuing the guarantee. The impact of adopting this Interpretation was not material to the Company’s results of
operations or financial position.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—
Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based
Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the effect of the method used on
reported results. The transition and disclosure provisions of SFAS No. 148 are effective for financial statements
for interim and fiscal years ending after December 15, 2002, with early application permitted for entities with a
fiscal year ending prior to December 15, 2002. We adopted the disclosure provisions of SFAS No. 148 effective
December 31, 2002 and the transition provisions effective January 1, 2003.
In December 2003, the FASB revised FIN No. 46, “Consolidation of Variable Interest Entities—an
Interpretation of “Accounting Research Bulletin” (“ARB”) No. 51.” This Interpretation, originally issued in
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