Comfort Inn 2005 Annual Report Download - page 23

Initial franchise and relicensing fees are recognized, in most instances, in the period the related franchise
agreement is executed because the initial franchise and relicensing fees are non-refundable and the Company has
no continuing obligations related to the franchisee. We defer the initial franchise and relicensing fee revenue
related to franchise agreements which include incentives until the incentive criteria are met or the agreement is
terminated, whichever occurs first.
We account for partner services revenues from endorsed vendors 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. Pursuant to SAB 104, 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. We defer the recognition of partner
services revenues related to certain upfront fees and recognize them over a period corresponding to the
Company’s estimate of the life of the arrangement.
Marketing and Reservation Revenues and Expenses.
The Company records marketing and reservation revenues and expenses in accordance with Emerging
Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,”
which requires that these revenues and expenses be recorded gross. In addition, net advances to and repayments
from the franchise system for marketing and reservation activities are presented as cash flows from operating
activities.
Reservation fees and marketing fees not expended in the current year are carried over to the next fiscal year
and expended in accordance with the franchise agreements. Shortfall amounts are similarly recovered in
subsequent years. Cumulative excess or shortfall amounts from the operation of these programs are recorded as a
marketing or reservation fee payable or receivable. Under the terms of the franchise agreements, the Company
may advance capital as necessary for marketing and reservation activities and recover such advances through
future fees. Our current assessment is that the credit risk associated with the marketing fee receivable is mitigated
due to our contractual right to recover these amounts from a large geographically dispersed group of franchisees.
Choice Privileges is our frequent guest incentive marketing program. Choice Privileges enables members to
earn points based on their spending levels at participating brands and, to a lesser degree, through participation in
affiliated partners’ programs, such as those offered by credit card companies. The points may be redeemed for
free accommodations or other benefits. Points cannot be redeemed for cash.
The Company collects a percentage of program members’ room revenue from participating franchises.
Revenues are deferred in an amount equal to the fair value of the future redemption obligation. A third-party
actuary estimates the eventual redemption rates and point values using various actuarial methods. These
judgmental factors determine the required liability for outstanding points. Upon redemption of the points, the
Company recognizes the previously deferred revenue as well as the corresponding expense relating to the cost of
the awards redeemed. Revenues in excess of the estimated future redemption obligation are recognized when
earned to reimburse the Company for costs incurred to operate the program, including administrative costs,
marketing, promotion and performing member services. Costs to operate the program, excluding estimated
redemption values, are expensed when incurred.
Impairment Policy.
We evaluate the fair value of goodwill to assess potential impairments on an annual basis, or during the year
if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset.
We evaluate impairment of goodwill by comparing the fair value of our net assets with the carrying amount of
goodwill. We evaluate the potential impairment of property and equipment and other long-lived assets, including
franchise rights whenever an event or other circumstance indicates that we may not be able to recover the
carrying value of the asset. Our evaluation is based upon future cash flow projections. These projections reflect
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