Sonic 2002 Annual Report Download - page 28

Sonic 02 26
Notes to Consolidated Financial Statements
August 31, 2002, 2001 and 2000 (In thousands, except share data)
which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which
generally represents the individual restaurant. The company’s primary test for an indicator of potential impairment is
operating losses. If an indication of impairment is determined to be present, the company estimates the future cash
flows expected to be generated from the use of the asset and its eventual disposal. If the sum of undiscounted future
cash flows is less than the carrying amount of the asset, an impairment loss is recognized. The impairment loss is
measured by comparing the fair value of the asset to its carrying amount. The fair value of the asset is measured by
either calculating the present value of estimated future cash flows using a discount rate equivalent to the rate of return
the company expects to achieve from its investment in newly-constructed restaurants or appraisals.
Assets held for disposal are carried at the lower of depreciated cost or fair value less cost to sell. Fair values are
estimated based upon appraisals or independent assessments of the assets’ estimated sales values. During the period in
which assets are being held for disposal, depreciation and amortization of such assets are not recognized.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets.” SFAS No. 144 requires that an impairment loss be recognized only if the carrying
amount of a long-lived asset is not recoverable from its undiscounted cash flows and that the measurement of any
impairment loss be the difference between the carrying amount and the fair value of the asset. The company adopted
the Statement effective September 1, 2002, which did not result in a material impact on its consolidated financial
position or results of operation.
Goodwill and Other Intangible Assets
The company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective September 1, 2001.
Statement No. 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Intangible
assets with lives restricted by contractual, legal, or other means will continue to be amortized over their useful lives.
Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be impaired. SFAS No. 142 requires a two-step process
for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether
an indication of impairment exists. If an impairment is indicated, then the fair value of the reporting unit’s goodwill is
determined by allocating the unit’s fair value to its assets and liabilities (including any unrecognized intangible assets) as
if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill and other
intangible assets is measured as the excess of its carrying value over its fair value. No such impairment losses were
recorded upon the initial adoption of SFAS No. 142. Prior to the adoption of SFAS No. 142, goodwill was being
amortized on a straight-line basis over periods not exceeding 40 years.
The company’s intangible assets subject to amortization under SFAS No. 142 consist primarily of acquired franchise
agreements, franchise fees, and other intangibles. Amortization expense is calculated using the straight-line method over
the expected period of benefit, not exceeding 15 years. The company’s trademarks and trade names were deemed to have
indefinite useful lives and are not subject to amortization. See Note 5 for additional disclosures related to goodwill and
other intangibles.
Franchise Fees and Royalties
Initial franchise fees are nonrefundable and are recognized in income when all material services or conditions
relating to the sale of the franchise have been substantially performed or satisfied by the company. Area development
fees are nonrefundable and are recognized in income on a pro rata basis when the conditions for revenue recognition
under the individual development agreements are met. Both initial franchise fees and area development fees are
generally recognized upon the opening of a franchise drive-in or upon termination of the agreement between the
company and the franchisee.
The company’s franchisees are required under the provisions of the license agreements to pay the company royalties
each month based on a percentage of actual net royalty sales. However, the royalty payments and supporting financial
statements are not due until the 20th of the following month. As a result, the company accrues royalty revenue in the
month earned based on estimates of franchise store sales. These estimates are based on actual sales at company-owned
stores and projections of average unit volume growth at franchise stores.