Sonic 2008 Annual Report Download - page 59

Revenue Recognition Related to Franchise Fees and Royalties. Initial franchise fees are recognized in income
when we have substantially performed or satisfied all material services or conditions relating to the sale of the
franchise and the fees are nonrefundable. Area development fees are nonrefundable and are recognized in
income on a pro-rata basis when the conditions for revenue recognition under the individual area 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 Sonic and the franchisee.
Our franchisees are required under the provisions of the license agreements to pay royalties to Sonic each
month based on a percentage of actual net sales. However, the royalty payments and supporting financial
statements are not due until the 10th of the following month for the new form of license agreement (Number
7) and the 20th of the following month for all prior forms of license agreement. As a result, we accrue royalty
revenue in the month earned based on estimates of Franchise Drive-Ins sales. These estimates are based on
projections of average unit volume growth at Franchise Drive-Ins collected from a majority of Franchise Drive-Ins.
Accounting for Stock-Based Compensation. We account for stock-based compensation in accordance with
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”).
We estimate the fair value of options granted using the Black-Scholes option pricing model along with the
assumptions shown in Note 12 of Notes to the Consolidated Financial Statements. The assumptions used in
computing the fair value of share-based payments reflect our best estimates, but involve uncertainties relating
to market and other conditions, many of which are outside of our control. We estimate expected volatility
based on historical daily price changes of the company’s stock for a period equal to the current expected term
of the options. The expected option term is the number of years the company estimates that options will be
outstanding prior to exercise considering vesting schedules and our historical exercise patterns. If other
assumptions or estimates had been used, the stock-based compensation expense that was recorded during fiscal
year 2008 could have been materially different. Furthermore, if different assumptions are used in future periods,
stock-based compensation expense could be materially impacted.
Income Taxes. We estimate certain components of our provision for income taxes. These estimates include,
among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for
items such as wages paid to certain employees, effective rates for state and local income taxes and the tax
deductibility of certain other items.
Our estimates are based on the best available information at the time that we prepare the provision,
including legislative and judicial developments. We generally file our annual income tax returns several months
after our fiscal year end. Income tax returns are subject to audit by federal, state and local governments, typically
several years after the returns are filed. These returns could be subject to material adjustments or differing
interpretations of the tax laws. Adjustments to these estimates or returns can result in significant variability in
the tax rate from period to period.
Leases. Certain Partner Drive-Ins lease land and buildings from third parties. Rent expense for operating
leases is recognized on a straight-line basis over the expected lease term, including cancelable option periods
when it is deemed to be reasonably assured that we would incur an economic penalty for not exercising the
options. Judgment is required to determine options expected to be exercised. Within the provisions of certain
of our leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal
periods. The effects of the rent holidays and escalations are reflected in rent expense on a straight-line basis over
the expected lease term, including cancelable option periods when appropriate. The lease term commences on
the date when we have the right to control the use of lease property, which can occur before rent payments are
due under the terms of the lease. Contingent rent is generally based on sales levels and is accrued at the point
in time we determine that it is probable that such sales levels will be achieved.
Managemen' Discuio  Anali  nancia Condo  Resu  Operaon
13
Sonic Corp. 2008 Annual Report