Sonic 2009 Annual Report Download - page 32

1. Summary of Significant Accounting Policies
Operations
Sonic Corp. (the “company”) operates and franchises a chain of quick-service drive-ins in the United States. It derives its revenues
primarily from Partner Drive-In sales and royalty fees from franchisees. The company also leases signs and real estate, and owns a
minority interest in several Franchise Drive-Ins.
Principles of Consolidation
The accompanying financial statements include the accounts of the company, its wholly owned subsidiaries and its majority-owned
Partner Drive-Ins, organized as general partnerships and limited liability companies. All significant intercompany accounts and transactions
have been eliminated.
Certain amounts have been reclassified in the Consolidated Financial Statements to conform to the fiscal year 2009 presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the amounts reported and contingent assets and liabilities
disclosed in the financial statements and accompanying notes. Actual results may differ from those estimates, and such differences may
be material to the financial statements.
Cash Equivalents
Cash equivalents consist of highly liquid investments, primarily money market accounts that mature in three months or less from
date of purchase, and depository accounts.
Restricted Cash
As of August 31, 2009, the company had restricted cash balances totaling $35,368 for funds required to be held in trust for the
benefit of senior note holders under the company’s debt arrangements. The current portion of restricted cash of $24,900 represents
amounts to be returned to Sonic or paid to service current debt obligations. The noncurrent portion of $10,468 represents interest
reserves required to be set aside for the duration of the debt.
Accounts and Notes Receivable
The company charges interest on past due accounts receivable at a rate of 18% per annum. Interest accrues on notes receivable
based on contractual terms. The company monitors all accounts for delinquency and provides for estimated losses for specific receivables
that are not likely to be collected. In addition, a general provision for bad debt is estimated based on historical trends.
Inventories
Inventories consist principally of food and supplies that are carried at the lower of cost (first-in, first-out basis) or market.
Property, Equipment and Capital Leases
Property and equipment are recorded at cost, and leased assets under capital leases are recorded at the present value of future
minimum lease payments. Depreciation of property and equipment and capital leases is computed by the straight-line method over the
estimated useful lives or the lease term, including cancelable option periods when appropriate, and are combined for presentation in the
financial statements.
Accounting for Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of 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. Fair value is typically determined to be the value of the land, since drive-in buildings
and improvements are single-purpose assets and have little value to market participants. The equipment associated with a store can be
easily relocated to another store, and therefore is not adjusted.
Notes to Consolidated Financial Statements
August 31, 2009, 2008 and 2007 (In thousands, except per share data)
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