Sonic 2006 Annual Report Download - page 39

typically not required. Rather, because drive-in buildings are typically single-purpose assets, the impairment provided
is equal to the carrying amount of the building and any improvements. The equipment associated with a store can be
easily relocated to another store, and therefore is not adjusted.
Surplus property assets are carried at the lower of depreciated cost or fair value less cost to sell.The majority of
the value in surplus property is land. Fair values are estimated based upon appraisals or independent assessments of
the assets’ estimated sales values.
Goodwill and Other Intangible Assets
The company accounts for goodwill and other intangible assets in accordance with SFAS No. 142,“Goodwill and
Other Intangible Assets”. Intangible assets with lives restricted by contractual, legal, or other means are 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 20 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.
Ownership Program
The company’s drive-in philosophy stresses an ownership relationship with drive-in supervisors and 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 the company 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 the company 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 is 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 SFAS No. 142.
Sonic Corp. 2006 Annual Report
37
Notes to Consolidated
Financial Statements
August 31, 2006, 2005 and 2004
(In thousands, except per share data)