Comfort Inn 2007 Annual Report Download - page 45

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Off Balance Sheet Arrangements: In March 2006, the Company guaranteed $1 million of a bank loan funding a
franchisee’ s construction of a Cambria Suites in Green Bay, Wisconsin. The guaranty was scheduled to expire in
September 2010. In February 2007, the Company was released from its obligations under the March 2006 guaranty, and
subsequently, on May 3, 2007, issued a new $1 million guaranty for a bank loan funding the construction for the same
franchisee’ s Cambria Suites in Green Bay, Wisconsin. The guaranty expires in August 2010. The Company has received
personal guarantees from several of the franchisee’ s principal owners related to the repayment of any amounts paid by the
Company under the guaranty.
Inflation: Inflation has been moderate in recent years and has not had a significant impact on our business.
Seasonality: The hotel industry is seasonal in nature. For most of the Company’ s franchised hotels, demand is lower
in December through March than during the remainder of the year. Our principal source of revenues is franchise fees
based on the gross room revenues of our franchised properties. The Company’ s franchise fee revenues and operating
income reflect the industry’ s seasonality and historically have been lower in the first quarter than in the second, third or
fourth quarters.
Critical Accounting Policies
Our accounting policies comply with principles generally accepted in the United States. We have described below
those policies that we believe are critical and require the use of complex judgment or significant estimates in their
application. Additional discussion of these policies is included in Note 1 to our consolidated financial statements.
Revenue Recognition.
The Company accounts for initial, relicensing and continuing franchise fees in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 45, “Accounting for Franchise Fee Revenue.” We recognize continuing
franchise fees, including royalty, marketing and reservations fees, when earned and receivable from our franchisees.
Franchise fees are typically based on a percentage of gross room revenues of each franchisee. Our estimate of the
allowance for uncollectible royalty fees is charged to selling, general and administrative expense.
The Company may also enter into master development agreements (“MDAs”) with developers that grant limited
exclusive development rights and preferential franchise agreement terms for one-time, non-refundable fees. When these
fees are not contingent upon the number of agreements executed under the MDA, the Company accounts for these up-
front fees in accordance with Staff Accounting Bulletin (‘SAB”) No. 104, “Revenue Recognition” (“SAB No. 104”) and
recognizes the up-front fees over the MDAs’ contractual life.
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 brand solutions revenues from endorsed vendors in accordance with SAB 104. SAB 104 provides
guidance on the recognition, presentation and disclosure of revenue in financial statements. Pursuant to SAB 104, the
Company recognizes brand solutions 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 brand
solutions 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
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