Sonic 2014 Annual Report Download - page 34

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 from 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 NQs, the vesting of
RSUs, and disqualifying dispositions of ISOs.
The threshold for recognizing the financial statement effects of a tax position is 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. 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 - Income Taxes.
Fair Value Measurements
The Company’s financial assets and liabilities consist of cash and cash equivalents, accounts and notes receivable, accounts
payable and long-term debt. The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximates
their carrying amounts due to the short term nature of these assets and liabilities.
The following methods and assumptions were used by the Company in estimating fair values of its financial instruments:
•
Notes receivable - As of August 31, 2014 and 2013, the carrying amounts of notes receivable (both current and non-current)
approximate fair value due to the effect of the related allowance for doubtful accounts
•
Long-term debt - The Company prepares a discounted cash flow analysis for its fixed rate borrowings to estimate fair value
each quarter. This analysis uses Level 2 inputs from market information available for public debt transactions for companies
with ratings that are similar to the Company’s ratings and from information gathered from brokers who trade in the Company’s
notes. The fair value estimate required significant assumptions by management. Management believes this fair value is a
reasonable estimate. For more information regarding the Company’s long-term debt, see note 10 - Debt and note 11 - Fair
Value of Financial Instruments.
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 sections “Accounting for Long-Lived
Assets” and “Goodwill and Other Intangible Assets,” discussed above, for inputs and valuation techniques used to measure the fair
value of these nonfinancial assets. The fair value was based upon management’s assessment as well as independent market value
assessments which involved Level 2 and Level 3 inputs.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with
Customers,” which requires entities to recognize revenue in the way it expects to be entitled for the transfer of promised goods
or services to customers. The ASU will replace most of the existing revenue recognition requirements in U.S. GAAP when it
becomes effective. This pronouncement is effective for annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period. The update permits the use of either the retrospective or cumulative effect transition
method, with early application not permitted. The Company is currently evaluating the effect that this pronouncement will have on
its financial statements and related disclosures.
Notes to Consolidated Financial Statements
August 31, 2014, 2013 and 2012 (In thousands, except per share data)
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