Sonic 2015 Annual Report Download - page 31

1. Summary of Significant Accounting Policies
Operations
Sonic Corp. (the “Company”) operates and franchises a chain of quick-service restaurants in the United States. It derives
its revenues primarily from Company Drive-In sales and royalty fees from franchisees. The Company also leases 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 a
number of Company Drive-Ins in which a subsidiary has a controlling ownership interest. All intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles
(“GAAP”) in the United States (“U.S.”) 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.
Segment Reporting
In accordance with Accounting Standards Update (“ASU”) 280, “Segment Reporting,” the Company uses the management
approach for determining its reportable segments. The management approach is based upon the way that management
reviews performance and allocates resources. The Company’s chief operating decision maker and his management team
review operating results on a consolidated basis for purposes of allocating resources and evaluating the financial performance
of the Sonic brand. Accordingly, the Company has determined that it has one operating segment and, therefore, one reporting
segment.
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, 2015, the Company had restricted cash balances totaling $19.8 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
$13.3 million represents amounts to be returned to Sonic or paid to service current debt obligations. The noncurrent portion
of $6.5 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 that the collection is no longer reasonably assured. 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.
Notes to Consolidated Financial Statements
August 31, 2015, 2014 and 2013 (In thousands, except per share data)
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