Comfort Inn 2007 Annual Report Download - page 55

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company Information and Significant Accounting Policies
Company Information
Choice Hotels International, Inc. and subsidiaries (together “the Company”) is in the business of hotel franchising.
As of December 31, 2007, the Company had franchise agreements representing 5,570 open hotels and 1,093 hotels under
development in 49 states, the District of Columbia and 39 countries and territories outside the United States under the
brand names: Comfort Inn®, Comfort Suites®, Quality® , Clarion®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay
Suites®, Suburban Extended Stay Hotel®, Cambria Suites® and Flag Hotels®.
Our direct lodging property real estate exposure at December 31, 2007 and 2006 was limited to three company-
owned MainStay Suites® hotels.
Principles of Consolidation
The consolidated financial statements include the accounts of Choice Hotels International, Inc. and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation.
On October 30, 2006, the Company acquired 100% of the stock of Choice Hotels Franchise GmbH (“CHG”), a
franchising business operating principally in Germany and surrounding countries. The results of CHG have been
consolidated since October 30, 2006.
During 2006, the Company formed a wholly-owned subsidiary, Choice Hotels France SAS (“CHF”), which acquired
the assets of a franchising business in continental Europe. The acquisition was completed on November 30, 2006 and the
results of CHF have been included since that date.
During 2005, the Company acquired 100% of the stock of Suburban Franchise Holding Company, Inc. (“Suburban”)
(the “Suburban Transaction”) and its wholly owned subsidiary, Suburban Franchise Systems, Inc. The results of Suburban
have been consolidated since September 28, 2005.
Reclassifications in Consolidated Financial Statements
Marketing and reservation revenues and expenses in the prior years’ financial statements have been reclassified to
conform to the current year presentation with no effect on previously reported net income or shareholders’ deficit.
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.” The Company enters into
franchise agreements to provide franchisees with various marketing services, a centralized reservation system and limited
non-exclusive rights to utilize the Company’ s registered tradenames and trademarks. These agreements typically have an
initial term of up to twenty years with provisions permitting franchisees to terminate after five, ten, or fifteen years under
certain circumstances. In most instances, initial franchise and relicensing fees are recognized upon execution of the
franchise agreement because the initial franchise and relicensing fees are non-refundable and the Company has no
continuing obligations related to the franchisee. The initial franchise and relicensing fees related to executed franchise
agreements which include incentives, such as future potential rebates, are deferred and recognized when the incentive
criteria are met or the agreement is terminated, whichever occurs first.
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.
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