Sonic 2010 Annual Report Download - page 33

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 Company-owned Drive-In sales and royalty fees from franchisees. The company also leases signs and real
estate, and receives equity earnings in noncontrolling ownership in a number of Franchise Drive-Ins.
Principles of Consolidation
The accompanying financial statements include the accounts of the company, its wholly owned subsidiaries and its Company-
owned Drive-Ins. 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 2010 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, 2010, the company had restricted cash balances totaling $22,231 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 $12,546
represents amounts to be returned to Sonic or paid to service current debt obligations. The noncurrent portion of $9,685 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 amortization of capital leases are 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 Accounting Standards Codification (ASC) Topic 360, 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, 2010, 2009 and 2008 (In thousands, except per share data)
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