Comfort Inn 2005 Annual Report Download - page 38

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
signed into law. The AJCA created a temporary one-time incentive for United States multinational corporations
to repatriate undistributed earnings of foreign subsidiaries by providing an 85 percent dividends received
deduction for qualifying dividends from controlled foreign corporations, as defined in the AJCA, resulting in an
effective tax rate of 5.25% on any such repatriated foreign earnings. The Company elected to apply this one-time
provision to qualifying earnings repatriations in 2005. During the fourth quarter of 2005, the Company
repatriated earnings totaling approximately $23.5 million, resulting in the recordation of an income tax provision
totaling approximately $1.2 million.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in
the application of complex tax laws. Judgment is required in determining our worldwide income tax provision. In
the ordinary course of global business, there are many transactions and calculations where the ultimate tax
outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements
among related entities. Although we believe our estimates are reasonable, no assurance can be given that the final
tax outcome of these matters will not be different than that which is reflected in our historical income tax
provisions and accruals. Resolution of these uncertainties in a manner inconsistent with the Company’s
expectations could have a material impact on the Company’s results of operations. The Company accounts for
income tax contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.”
Tax savings resulting from deductions greater than compensation cost reflected in net income, if any, for
stock-based employee compensation is credited directly to additional paid-in-capital when realization of such
benefit is fully assured.
Earnings per Share.
Basic earnings per share exclude dilution and are computed by dividing net income by the weighted-average
number of common shares outstanding. Diluted earnings per share, assumes dilution and is computed based on
the weighted-average number of common shares outstanding after consideration of the dilutive effect of stock
options and unvested restricted stock.
Use of Estimates.
The consolidated financial statements are prepared in conformity with accounting principles generally
accepted in the United States and require management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. Stock Split
On September 14, 2005, the Company’s board of directors declared a two-for-one stock split effected in the
form of a stock dividend. The stock dividend was distributed on October 21, 2005 to shareholders of record on
October 7, 2005. As a result of the stock dividend, the accompanying consolidated financial statements reflect an
increase in the number of outstanding shares of common stock and the transfer of the par value of these
additional shares from paid in capital. Treasury shares were not split. Share data and earnings per share data in
these consolidated financial statements reflect the stock split, applied retroactively, to all periods presented.
Previously awarded stock options and restricted stock awards payable in the Company’s common stock have
been adjusted to reflect the stock dividend.
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