Sonic 2013 Annual Report Download - page 37

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.
The Company records a liability in the period in which a gift card is sold. The gift cards do not have expiration
dates. As gift cards are redeemed, the liability is reduced with revenue recognized on redemptions at Company
Drive-Ins. Breakage is the amount on a gift card that is not expected to be redeemed and that the Company is not
required to remit to a state under unclaimed property laws. The Company estimates breakage based upon the
historical trend in redemption patterns from previously sold gift cards. The Company’s policy is to recognize the
breakage, using the delayed recognition method, when it is apparent that there is a remote likelihood the gift card
balance will be redeemed. The Company reduces the gift card liability for the estimated breakage and uses that
amount to defray the costs of operating the gift card program. There is no income recognized on unredeemed gift
card balances.
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. Development
fees are nonrefundable and are recognized in income on a pro-rata basis when the conditions for revenue recognition
under the individual development agreements are met. Both franchise fees and development fees are generally
recognized upon the opening of a Franchise Drive-In or upon termination of the agreement between the Company
and the franchisee.
The Company’s franchisees pay royalties based on a percentage of sales. Royalties are recognized as revenue
when they are earned.
Operating Leases
Rent expense 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 the Company would incur an economic penalty for not
exercising the options. Within the terms of some of the leases, there are rent holidays and/or escalations in
payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have
been reflected in rent expense on a straight-line basis over the expected lease term, which includes cancelable
option periods when appropriate. The lease term commences on the date when the Company has the right to
control the use of the leased 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 it is probable that such sales
levels will be achieved.
Advertising Costs
Costs incurred in connection with the advertising and promoting of the Company’s products are included in
other operating expenses and are expensed as incurred. Such costs amounted to $22.4 million, $22.6 million and
$22.5 million in fiscal years 2013, 2012 and 2011, respectively.
Under the Company’s franchise agreements, both Company Drive-Ins and Franchise Drive-Ins must contribute
a minimum percentage of revenues to a national media production fund (Sonic Brand Fund) and spend an additional
minimum percentage of gross revenues on advertising, either directly or through Company-required participation in
advertising cooperatives. A significant portion of the advertising cooperative contributions is remitted to the
System Marketing Fund, which purchases advertising on national cable and broadcast networks, local broadcast
networks and funds other national media expenses and sponsorship opportunities. As stated in the terms of existing
franchise agreements, these funds do not constitute assets of the Company, and the Company acts with limited
agency in the administration of these funds. Accordingly, neither the revenues and expenses nor the assets and
liabilities of the advertising cooperatives, the Sonic Brand Fund or the System Marketing Fund are included in the
Company’s consolidated financial statements. However, all advertising contributions by Company Drive-Ins are
recorded as expense on the Company’s financial statements.
Stock-Based Compensation
Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and
is recognized as an expense on a straight-line basis over the requisite service period of the award (generally the
vesting period of the grant) or to an employee’s eligible retirement date, if earlier.
Notes to Consolidated Financial Statements
August 31, 2013, 2012 and 2011 (In thousands, except per share data)
35