Comfort Inn 2007 Annual Report Download - page 56

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
Royalty fees, which are typically based on a percentage of gross room revenues of each franchisee, are recorded
when earned and receivable from the franchisee. An estimate of uncollectible royalty fees is charged to bad debt expense
and included in selling, general and administrative expenses in the accompanying consolidated statements of income.
The Company generates brand solutions revenues from endorsed vendors. Brand solutions revenues are generally
earned based on the level of goods or services purchased from endorsed vendors by hotel franchise owners and hotel
guests who stay in the Company’ s franchised hotels. The Company accounts for brand solutions revenues in accordance
with SAB No. 104 which provides guidance on the recognition, presentation and disclosure of revenue in financial
statements. The Company recognizes brand solutions revenues when the services are performed or the product is
delivered, evidence of an arrangement exists, the fee is fixed and determinable and collectibility is probable. SAB No. 104
requires the Company to defer the recognition of brand solution’ s revenues related to upfront fees. Such upfront fees are
generally recognized over a period corresponding to the Company’ s estimate of the life of the arrangement.
Marketing and Reservation Revenues and Expenses
The Company’ s franchise agreements require the payment of certain marketing and reservation fees, which are used
exclusively by the Company for expenses associated with providing franchise services such as national marketing, media
advertising, central reservation systems and technology services. The Company is contractually obligated to expend the
marketing and reservation fees it collects from franchisees in accordance with the franchise agreements; as such, no
income or loss to the Company is generated. In accordance with our contracts, we include in marketing and reservation
expenses an allocation of costs for certain activities, such as human resources, legal, accounting, etc., required to carry out
marketing and reservation activities.
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 from and repayments related to marketing and
reservation activities are presented as cash flows from operating activities.
Choice Privileges is our principal frequent guest loyalty 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, which we accumulate and track on the members’
behalf, may be redeemed for free accommodations, airline frequent flier program miles or other benefits. Points cannot be
redeemed for cash.
We provide Choice Privileges as a marketing program to participating hotels. The cost of operating the program,
including the estimated cost of award redemptions, are charged to the participating hotels by collecting a percentage of
program members’ room revenue from participating franchises. Revenues are deferred equal to the estimated fair value of
the future redemption obligation. A third-party actuary estimates redemption rates and point values using various actuarial
methods. These judgmental factors determine the required liability for unredeemed 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.
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