Sonic 2011 Annual Report Download - page 29

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Management's Discussion and Analysis of Financial Condition and Results of Operations
Accounting for Stock-Based Compensation. We account for stock-based compensation in accordance with Accounting
Standards Codification (“ASC”) Topic 718, Stock Compensation. We estimate the fair value of options granted using the
Black-Scholes option pricing model along with the assumptions shown in note 13 – Stockholders’ Equity in the Notes to the
Consolidated Financial Statements in this Form 10-K. The assumptions used in computing the fair value of stock-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
2011 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.
We account for uncertain tax positions under ASC Topic 740, Income Taxes, which sets out criteria for the use of
judgment in assessing the timing and amounts of deductible and taxable items. Although we believe we have adequately
accounted for our uncertain tax positions, from time to time, audits result in proposed assessments where the ultimate
resolution may give rise to us owing additional taxes. We adjust our uncertain tax positions in light of changing facts and
circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate,
and penalty and interest accruals associated with uncertain tax positions until they are resolved. We believe that our tax
positions comply with applicable tax law and that we have adequately provided for these matters. However, to the extent
that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the
provision for income taxes in the period in which such determination is made.
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. We lease the land and buildings for certain Company Drive-Ins 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 terms of some 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.
Accounts and Notes Receivable. We charge interest on past due accounts receivable and recognize income as it is
collected. Interest accrues on notes receivable based on the contractual terms of the respective note. We monitor all
accounts and notes receivable for delinquency and provide for estimated losses for specific receivables that are not likely
to be collected. We assess credit risk for accounts and notes receivable of specific franchisees based on payment history,
current payment patterns, the health of the franchisee’s business, and an assessment of the franchisee’s ability to pay
outstanding balances. In addition to allowances for bad debt for specific franchisee receivables, a general provision for bad
debt is estimated for accounts receivable based on historical trends. Account balances generally are charged against the
allowance when we believe it is probable that the receivable will not be recovered and legal remedies have been exhausted.
We continually review our allowance for doubtful accounts.