Sonic 2006 Annual Report Download - page 31

Critical Accounting Policies and Estimates
The Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this
document contain information that is pertinent to management's discussion and analysis.The preparation of financial
statements in conformity with generally accepted accounting principles requires management to use its judgment to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities.These assumptions and estimates could have a material effect on our financial
statements.We evaluate our assumptions and estimates on an ongoing basis using historical experience and various
other factors that are believed to be relevant under the circumstances. Actual results may differ from these estimates
under different assumptions or conditions.
We annually review our financial reporting and disclosure practices and accounting policies to ensure that our
financial reporting and disclosures provide accurate and transparent information relative to the current economic and
business environment. We believe that of our significant accounting policies (see Note 1 of Notes to Consolidated
Financial Statements), the following policies involve a higher degree of risk, judgment and/or complexity.
Impairment of Long-Lived Assets.We review each Partner Drive-In for impairment when events or circumstances
indicate it might be impaired.We test for impairment using historical cash flows and other relevant facts and
circumstances as the primary basis for our estimates of future cash flows. This process requires the use of estimates
and assumptions,which are subject to a high degree of judgment. In addition, at least annually, we assess the
recoverability of goodwill and other intangible assets related to our brand and drive-ins.These impairment tests
require us to estimate fair values of our brand and our drive-ins by making assumptions regarding future cash flows
and other factors.As of August 31, 2006, we reviewed 21 Partner Drive-ins with combined carrying amounts of $4.9
million in property, equipment and capital leases for possible impairment, and, based on our cash flow assumptions,
we determined that no impairments were needed. During the fourth quarter of fiscal year 2006, we performed our
annual assessment of recoverability of goodwill and other intangible assets and determined that no impairment was
indicated. As of August 31, 2006, goodwill and intangible assets totaled $107.7 million. If these assumptions change in
the future, we may be required to record impairment charges for these assets.
Ownership Program. Our drive-in philosophy stresses an ownership relationship with supervisors and drive-in
managers. Most supervisors and managers of Partner Drive-Ins own an equity interest in the drive-in, which is
financed by third parties. Supervisors and managers are neither employees of Sonic nor of the drive-in in which they
have an ownership interest.
The minority ownership interests in Partner Drive-Ins of the managers and supervisors are recorded as a minority
interest liability on the Consolidated Balance Sheets, and their share of the drive-in earnings is reflected as Minority
interest in earnings of Partner Drive-Ins in the Costs and expenses section of the Consolidated Statements of Income.
The ownership agreements contain provisions, which give Sonic the right, but not the obligation, to purchase the
minority interest of the supervisor or manager in a drive-in.The amount of the investment made by a partner and the
amount of the buy-out are based on a number of factors, primarily upon the drive-in’s financial performance for the
preceding 12 months, and are intended to approximate the fair value of a minority interest in the drive-in.
The company acquires and sells minority interests in Partner Drive-Ins from time to time as managers and
supervisors buy-out and buy-in to the partnerships or limited liability companies. If the purchase price of a minority
interest that we acquire exceeds the net book value of the assets underlying the partnership interest, the excess is
recorded as goodwill.The acquisition of a minority interest for less than book value is recorded as a reduction in
purchased goodwill. Any subsequent sale of the minority interest to another minority partner is recorded as a pro-rata
reduction of goodwill, and no gain or loss is recognized on the sale of the minority ownership interest. Goodwill
created as a result of the acquisition of minority interests in Partner Drive-Ins is not amortized but is tested annually
for impairment under the provisions of FAS 142,“Goodwill and Other Intangible Assets.”
Sonic Corp. 2006 Annual Report
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Management’s Discussion and
Analysis of Financial Condition
and Results of Operations