Comfort Inn 2007 Annual Report Download - page 62

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
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.
Pension, Profit Sharing and Incentive Plans
The Company sponsors two non-qualified retirement savings and investment plans for certain employees and senior
executives. Employee and Company contributions are maintained in separate irrevocable trusts. Legally, the assets of the
trusts remain those of the Company; however, access to the trusts’ assets is severely restricted. The trusts’ cannot be
revoked by the Company or an acquirer, but the assets are subject to the claims of the Company’ s general creditors. The
participants do not have the right to assign or transfer contractual rights in the trusts. The Company accounts for these
plans in accordance with EITF No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts
Earned Are Held in a Rabbi Trust and Invested” (“EITF 97-14”). Pursuant to EITF 97-14, as of December 31, 2007 and
December 31, 2006, the Company had recorded a deferred compensation liability of $36.5 million and $32.9 million,
respectively. The change in the deferred compensation obligation related to changes in the fair value of the diversified
investments held in trust and to earnings credited to participants is recorded in compensation expense. The diversified
investments held in the trusts were $34.5 million and $31.5 million as of December 31, 2007 and December 31, 2006,
respectively, and are recorded at their fair value, based on quoted market prices. The change in the fair value of the
diversified assets held in trust is recorded in accordance with SFAS 115 as trading security income (loss) and is included
in other income and expenses, net in the accompanying statements of income.
Effective December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R),” (“SFAS
No. 158”) which requires employers to: (a) recognize in its statement of financial position an asset for a plan’ s over
funded status or a liability for a plan’ s under funded status; (b) measure a plan’ s assets and its obligations that determine
its funded status as of the end of the employer’ s fiscal year; and (c) recognize changes in the funded status of a defined
benefit postretirement plan in the year in which the changes occur.
As a result of this adoption, the Company increased its pension benefit obligations at December 31, 2006 by
approximately $2.6 million with a corresponding change, net of tax, reported in accumulated other comprehensive
income. The Company previously measured its plan assets and benefit obligation as of its fiscal year end and therefore no
adjustments will be required resulting from the adoption of this provision. The following table illustrates the incremental
effect of applying SFAS No. 158 on individual line items in the statement of financial position as of December 31, 2006.
Before
Application
of SFAS 158
Adjustments
After
Application
of SFAS 158
(In thousands)
Deferred compensation and retirement plan obligations............................. $ 37,463 $ 2,638 $ 40,101
Total liabilities ............................................................................................ 363,051 2,638 365,689
Deferred income taxes................................................................................. 21,329 1,122 22,451
Other assets (Intangible asset)..................................................................... 362 (362) —
Total assets.................................................................................................. 302,549 760 303,309
Accumulated other comprehensive income................................................. 1,106 (1,878) (772)
Total shareholders’ deficit........................................................................... (60,502) (1,878) (62,380)
The adoption of SFAS No. 158 had no effect on the Company’ s consolidated statements of income or cash flows for
the year ended December 31, 2006, or for any prior period presented. See Note 16 to our consolidated financial
statements.
Prior to the adoption of the recognition provisions of SFAS No. 158, the Company recorded the liability for its
defined benefit post-retirement plans in accordance with SFAS No. 87, “Employers Accounting for Pensions” (“SFAS
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