Sonic 2010 Annual Report Download - page 36

The company grants both incentive and non-qualified stock options. For grants of non-qualified stock options, the company
expects to recognize a tax benefit on exercise of the option, so the full tax benefit is recognized on the related stock-based
compensation expense. For grants of incentive stock options, a tax benefit only results if the option holder has a disqualifying
disposition. As a result of the limitation on the tax benefit for incentive stock options, the tax benefit for stock-based compensation
will generally be less than the company’s overall tax rate, and will vary depending on the timing of employees’ exercises and sales
of stock. However, in fiscal year 2010, the company executed a stock option exchange which resulted in an additional tax benefit
of $1.8 million for the conversion of eligible incentive stock options to nonqualified stock options. Additional information regarding
the stock option exchange program is provided in Note 13.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax
purposes but do not affect earnings. These benefits are principally generated from employee exercises of non-qualified stock options
and disqualifying dispositions of incentive stock options.
The threshold for recognizing the financial statement effects of a tax position when it is more likely than not, based on the
technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially
and subsequently measured as the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement
with a taxing authority. Liabilities for unrecognized tax benefits related to such tax positions are included in other long-term liabilities
unless the tax position is expected to be settled within the upcoming year, in which case the liabilities are included in accrued expenses
and other current liabilities. Interest and penalties related to unrecognized tax benefits are included in income tax expense.
Additional information regarding the company’s unrecognized tax benefits is provided in Note 12.
Disclosures About Fair Value of Financial Instruments
ASC Topic 820 defines fair value, establishes a framework for its measurement and requires disclosures about fair value
measurements. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1
measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the fair value hierarchy are
described below:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment, credit risk, etc.).
Level 3—Significant unobservable inputs.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and
minimize the use of unobservable inputs.
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of August 31, 2010:
Level 1 Level 2 Level 3 Carrying Value
Cash equivalents $ 86,036 $–$–$86,036
Restricted cash (current) 12,546 ––12,546
Restricted cash (noncurrent) 9,685 ––9,685
Total assets at fair value $ 108,267 $–$–$108,267
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis, which means these assets and
liabilities are not measured at fair value on an ongoing basis but are subject to periodic impairment tests. For the company, these
items primarily include long-lived assets, goodwill and other intangible assets. Refer to Accounting for Long-Lived Assets and
Goodwill and Other Intangible Assets in Note 1 for inputs and valuation techniques used to measure the fair value of these
nonfinancial assets. The fair value was based upon management assessment as well as appraisals or independent assessments which
involved Level 3 inputs. There was a $15.2 million charge recorded for fiscal year 2010 for the impairment of long-lived assets. See
Note 3 for a description of the impairment.
Notes to Consolidated Financial Statements
August 31, 2010, 2009 and 2008 (In thousands, except per share data)
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