Sonic 2004 Annual Report Download - page 27

Accounting for Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. Assets are
grouped and evaluated for impairment at the lowest level for which there are identifiable
cash flows that are largely independent of the cash flows of other groups of assets, which
generally represents the individual drive-in. 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 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 drive-ins.
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 operations.
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.
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 Drive-In sales. These
estimates are based on actual sales at Partner Drive-Ins and projections of average unit
volume growth at Franchise Drive-Ins.
Advertising Costs
Costs incurred in connection with the advertising and promotion of the Company’s
products are expensed as incurred. Such costs amounted to $23,664,$19,665, and $16,544
for fiscal years 2004, 2003 and 2002, respectively.
Under the Company’s license agreements, both Partner-Drive-Ins and Franchise Drive-
Ins must contribute a minimum percentage of revenues to a national media production
fund (Sonic Advertising Fund) and spend an additional minimum percentage of gross
revenues on local advertising,either directly or through Company-required participation in
advertising cooperatives. A portion of the local advertising contributions is redistributed to
a System Marketing Fund, which purchases advertising on national cable and broadcast
networks and other national media and sponsorship opportunities. As stated in the terms
of existing license agreements, these funds do not constitute assets of the Company and
the Company acts with limited agency in the administration of these funds. Accordingly,
neither the revenues and expenses nor the assets and liabilities of the advertising
cooperatives, the Sonic Advertising Fund,or the System Marketing Fund are included in the
Company’s consolidated financial statements. However, all advertising contributions by
Partner Drive-Ins are recorded as expense on the Company’s financial statements.
Notes to Consolidated Financial Statements
August 31, 2004, 2003 and 2002 (In thousands, except share data)
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