Sonic 2011 Annual Report Download - page 36

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
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. The company’s reporting units are defined as company Drive-Ins and Franchise
Operations (see additional information regarding the company’s reporting units in note 14 - Segment Information). The
accounting guidance 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 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. See note 5 - Goodwill and Other Intangibles for additional disclosures related to goodwill
and other intangibles.
Ownership Structure
Company Drive-Ins are drive-in operations in which the company’s operating subsidiary, Sonic Restaurants, Inc. (“SRI”),
owns a controlling ownership interest. Historically, Company Drive-Ins have operated as individual limited liability companies
or general partnerships in which the manager and the supervisor for the respective drive-in own a noncontrolling interest
(generally, the “ownership program”). Under the ownership program, managers and supervisors shared in the cash flow
for their Company Drive-In but were also responsible for their share of any losses incurred by the drive-in. Effective April
1, 2010, the company introduced a new compensation program as an alternative to the ownership program to improve
retention. While partners and supervisors do not have an ownership interest in their drive-in(s) under the new compensation
program, the program provides managers and supervisors a larger portion of guaranteed base compensation but retains a
significant incentive component based on drive-in level performance.
For those Company Drive-Ins still in the company’s ownership program, noncontrolling interests are recorded as a
component of equity on the Consolidated Balance Sheets, and our partners’ share of the drive-in earnings are reflected as
net income - noncontrolling interests on the Consolidated Statements of Income.
Under the ownership program, the company acquires noncontrolling interests in company Drive-Ins as managers and
supervisors sell their ownership interests. If the purchase price of a noncontrolling interest that we acquire exceeds the
net book value of the assets underlying the partnership interest, the excess is recorded as paid-in capital. The acquisition
of a noncontrolling interest for less than book value is recorded as a reduction in paid-in capital.
Revenue Recognition, Franchise Fees and Royalties
Revenue from Company Drive-In sales is recognized when food and beverage products are sold. Company Drive-In sales
are presented net of sales tax and other sales-related taxes.
Initial franchise fees are recognized in income when the company has substantially performed or satisfied all material
services or conditions relating to the sale of the franchise and the fees are nonrefundable. Area development fees are
nonrefundable and are recognized in income on a pro-rata basis when the conditions for revenue recognition under the
3 4
Notes to Consolidated Financial Statements
August 31, 2011, 2010 and 2009 (In thousands, except per share data)