Comfort Inn 2007 Annual Report Download - page 46

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 on an annual
basis or 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 management’ s best assumptions
and estimates. Significant management judgment is involved in developing these projections, and they include inherent
uncertainties. If different projections had been used in the current period, the balances for non-current assets could have
been materially impacted. Furthermore, if management uses different projections or if different conditions occur in future
periods, future-operating results could be materially impacted.
Stock Compensation.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004),
“Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires that compensation cost relating to share based
payment transactions be recognized in financial statements based on the fair value of the equity or liability instruments
issued. Effective January 1, 2006, the Company adopted SFAS No. 123R using the modified prospective application
method and began applying its provisions to: (i) new awards, (ii) awards modified subsequent to the adoption date and
(iii) outstanding awards for which all requisite service had not yet been rendered. Under the modified-prospective
application method, compensation costs were recognized on the unvested portion of awards beginning on January 1, 2006
based on the grant-date fair value used for pro-forma disclosures under SFAS No. 148 “Accounting for Stock-Based
Compensation-Transition and Disclosure” over the remaining vesting period. Under this transition method, prior period
results have not been restated. The adoption of SFAS No. 123R reduced operating income and net income by
approximately $0.5 million and $0.3 million, respectively, and had no impact on earnings per share for the year ended
December 31, 2006. The adoption did not have a material impact on the Company’ s operating income, net income or
reported earnings per share for the year ended December 31, 2007 since the Company has been expensing share-based
awards granted since January 1, 2003 under the provisions of SFAS No. 123. Cash flows from financing activities for the
years ending December 31, 2007 and 2006 includes $6.2 million and $12.7 million, respectively in excess tax benefits
from stock-based compensation resulting from the adoption of SFAS No. 123R. Under SFAS No. 123, cash flows from
operating activities for the years ended December 31, 2005 included $9.9 million of excess tax benefits from stock-based
compensation. Prior to January 1, 2003, the Company accounted for stock-based awards under APB Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”).
Prior to the adoption of SFAS No. 123R, no stock-based compensation cost was reflected in the accompanying
consolidated statements of income related to the grant of stock options which occurred prior to January 1, 2003, because
the Company accounted for those grants under APB Opinion No. 25 and all such stock options granted had an exercise
price equal to the market value of the underlying common stock on the date of grant. Therefore, the cost related to stock-
based employee compensation included in the determination of net income for the year ended 2005 is less than that which
would have been recognized if the fair value based method had been applied to all awards since the original effective date
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