Sonic 2011 Annual Report Download - page 35

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 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 Drive-Ins. All significant intercompany accounts and transactions have been eliminated.
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, 2011, the company had restricted cash balances totaling $21.0 million for funds required to be held
in trust for the benefit of senior noteholders under the company’s debt arrangements. The current portion of restricted cash
of $12.9 million represents amounts to be returned to Sonic or paid to service current debt obligations. The noncurrent
portion of $8.1 million 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 and recognizes income as it is collected. Interest
accrues on notes receivable based on the contractual terms of the respective note. The company monitors all accounts
and notes receivable for delinquency and provides for estimated losses for specific receivables that are not likely to be
collected. The company assesses 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 the company’s accounts receivable based on historical trends. Account balances generally
are charged against the allowance when the company believes it is probable that the receivable will not be recovered and
legal remedies have been exhausted. The company continually reviews its allowance for doubtful accounts.
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
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, 2011, 2010 and 2009 (In thousands, except per share data)
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