Sonic 2008 Annual Report Download - page 58

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 Partner Drive-In and other long-lived assets for impairment
when events or circumstances indicate they 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. During fiscal year 2008, we reviewed Partner
Drive-Ins and other long-lived assets with combined carrying amounts of $26.1 million in property, equipment
and capital leases for possible impairment, and our cash flow assumptions resulted in impairment charges
totaling $0.6 million to write down certain assets to their estimated fair value. During the fourth quarter of fiscal
year 2008, we performed our annual assessment of recoverability of goodwill and other intangible assets and
determined that no impairment was indicated. As of August 31, 2008, goodwill and intangible assets totaled
$118.2 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 that 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, including
primarily 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. When the company sells a minority interest, the sales price is typically in
excess of the book value of the partnership interest, and the difference is recorded as a reduction of goodwill.
If the book value exceeds the sales price, the excess is recorded as goodwill. In either case, 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 142, “Goodwill and Other Intangible Assets.”
Managemen' Discuio  Anali  nancia Condo  Resu  Operaon
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Sonic Corp. 2008 Annual Report