Sonic 2009 Annual Report Download - page 33

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.” Goodwill is determined based on acquisition purchase price in excess of the fair value of identified assets. Intangible assets
with lives restricted by contractual, legal, or other means are amortized over their useful lives. The company tests all goodwill and other
intangible assets not subject to amortization at least annually for impairment using the fair value approach on a reporting unit basis in
accordance with SFAS No. 142. The company’s reporting units are defined as Partner Drive-Ins and Franchise Operations (see additional
information regarding the company’s reporting units in Note 14, Segment Information). SFAS No. 142 requires a two-step process for
testing impairment. 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.These impairment tests require us to estimate fair values of our drive-ins by making assumptions regarding future cash flows
and other factors.
We assess the recoverability of goodwill and other intangible assets related to our brand and drive-ins at least annually and more
frequently if events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. Goodwill
impairment testing first requires a comparison of the fair value of each reporting unit to the carrying value. We estimate fair value based
on a comparison of two approaches: discounted cash flow analyses and a market multiple approach. The discounted estimates of future
cash flows include significant management assumptions such as revenue growth rates, operating margins, weighted average cost of
capital, and future economic and market conditions. In addition, the market multiple approach includes significant assumptions such as
the use of recent historical market multiples to estimate future market pricing. These assumptions are significant factors in calculating
the value of the reporting units and can be affected by changes in consumer demand, commodity pricing, labor and other operating costs,
our cost of capital and our ability to identify buyers in the market. If the carrying value of the reporting unit exceeds fair value, goodwill
is considered impaired. The amount of the impairment is the difference between the carrying value of the goodwill and the “implied”
fair value, which is calculated as if the reporting unit had just been acquired and accounted for as a business combination.
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
in accrued liabilities and other noncurrent liabilities 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 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, 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 a 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.
Revenue Recognition, Franchise Fees and Royalties
Revenue from Partner Drive-In sales is recognized when food and beverage products are sold. We present Partner Drive-In sales
net of sales tax and other sales-related taxes.
Notes to Consolidated Financial Statements
August 31, 2009, 2008 and 2007 (In thousands, except per share data)
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