Company Information and Summary of Significant Accounting Policies

Organization

Choice Hotels International, Inc., a Delaware corporation, and subsidiaries (the "Company") is primarily in the business of hotel franchising. As of December 31, 2013, the Company had franchise agreements representing 6,340 open hotels and 503 hotels under construction, awaiting conversion or approved for development in 50 states, the District of Columbia and more than 35 countries and territories outside the United States under the brand names: Comfort Inn^®, Comfort Suites^®, Quality^® , Clarion^®, Sleep Inn^®, Econo Lodge^®, Rodeway Inn^®, MainStay Suites^®, Suburban Extended Stay Hotel^®, Cambria Suites^® and Ascend Hotel Collection^®.

Basis of Presentation

The accompanying consolidated financial statements present the financial position, results of operations and cash flows of Choice Hotels International, Inc. and subsidiaries. The Company consolidate entities under our control, including variable interest entities where it is deemed to be the primary beneficiary. Investments in unconsolidated affiliates, including corporate joint ventures and certain other entities, in which the Company owns 50% or less and exercises significant influence over the operating and financial policies of the investee are accounted for by the equity method. All significant inter-company accounts and transactions have been eliminated in consolidation.

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and require management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, ultimate results could differ from those estimates.

In our opinion, the accompanying consolidated financial statements include all adjustments that are necessary to fairly present our financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature.

Revision to Prior Period Financial Statements - Cash Flow Presentation

In the second quarter of 2013, a misapplication of GAAP was identified related to the presentation of cash flows pursuant to forgivable notes receivable. Previously, the Company applied Accounting Standards Codification ("ASC") 230 "Statement of Cash Flows" paragraphs 12 and 13 when reporting cash outflows and cash collections related to these notes receivable and as a result reported these items as cash flows from investing activities. Beginning with the second quarter of 2013, the Company has revised its presentation of these cash flows in accordance with ASC 230 paragraphs 22 and 23 to reclassify them to operating activities on the Company's Consolidated Statements of Cash Flows.

In conjunction with brand and development programs, the Company issues forgivable notes receivable to qualifying franchisees for property improvements and other purposes. Under the terms of the forgivable promissory notes, the Company ratably reduces the outstanding principal balance and related interest over the term of the loan contingent upon the franchisee remaining within the franchise system and operating in accordance with the terms of the franchise agreement including credit, quality and brand standards. Therefore, the predominant reduction of these notes receivable is through non-cash operating expenses and not cash collections of note receivable amounts. As a result, the Company revised the cash flow classification of these forgivable notes receivable from investing activities to operating activities.

In accordance with ASC 250 (SEC's Staff Accounting Bulletin 99, "Materiality"), the Company assessed the materiality of the misapplication of GAAP and concluded that the reclassification of these cash flows was not material to any of its previously issued annual or interim financial statements. In accordance with the accounting guidance in ASC 250 (SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements"), the Company has revised its previously issued financial statements to correct the presentation of these cash flows beginning with the financial statements in the Quarterly Report on Form 10-Q filed on August 9, 2013 for the quarterly period ended June 30, 2013. These revisions did not impact the Company's previously reported net income, comprehensive income, assets, liabilities or shareholders' deficit.

The following tables present the effect of the correction of the classification of the cash flows related to forgivable notes receivable on selected line items included in the Company's Consolidated Statements of Cash Flows for the affected periods included in these Consolidated Financial Statements:



	Year Ended December 31, 2012									Year Ended December 31, 2011
	(in thousands)
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
Net cash provided by operating activities:
Forgivable notes receivable, net	$	—		$	(10,898	)	$	(10,898	)	$	—		$	(3,475	)	$	(3,475	)
Net cash provided by operating activities	161,020			(10,898		)	150,122			134,844			(3,475		)	131,369
Net cash used in investing activities:
Issuance of mezzanine and other notes receivable	(34,925		)	11,189			(23,736		)	(12,766		)	3,539			(9,227		)
Collections of mezzanine and other notes receivable	3,561			(291		)	3,270			4,754			(64		)	4,690
Net cash used in investing activities	(57,999		)	10,898			(47,101		)	(23,804		)	3,475			(20,329		)

Revision to Annual Financial Statements - Revenue Recognition

In connection with the preparation of the consolidated financial statements for the second quarter of 2014, the Company reviewed its accounting policies and practices, including the historical practice of reporting royalty and certain marketing and reservation fees one month in arrears as compared to when the gross room revenues (on which the fees are based) are earned by the Company's franchisees. The Company previously determined that the impact of the revenue recognition timing related to these revenues on its annual financial statements was not material and therefore reported these revenues one month in arrears despite the fact that these fees meet the definition of being earned and realizable in the same period that the underlying gross room revenues are earned by its franchisees. However, the Company reassessed the impact of reporting these revenues one month in arrears on interim periods and determined that this revenue recognition practice, which was not in accordance with GAAP, was material to interim periods due to the seasonality of the Company's business but immaterial to its annual financial statements. As a result, the Company has corrected its revenue recognition method to recognize royalty and certain marketing and reservation system fees as revenue in the same period as the gross room revenues are earned by its franchisees.

In accordance with ASC 250 (SEC's Staff Accounting Bulletin 99, "Materiality"), the Company assessed the materiality of the misapplication of GAAP and concluded that the restatement of revenues was not material to any of its previously issued annual financial statements but was material to certain interim periods. In accordance with the accounting guidance in ASC 250 (SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements"), the Company restated its previously issued interim financial statements for the periods ended June 30, 2013, March 31, 2014 and 2013 and September 30, 2013 and 2012 through the filing of amended quarterly filings on Form 10-Q. In addition, the Company has revised its previously issued audited financial statements for the year ended December 31, 2013 to correct the presentation of revenues for the years ended December 31, 2013, 2012 and 2011 and amend its report on internal control over financial reporting at December 31, 2013 in this amended Form 10-K.

The following tables present the effect of this and other immaterial errors for the financial statement line items impacted in the affected periods included within this annual financial report. In addition, these amounts have been adjusted to reflect the Company's discontinued operations reported in the first quarter of 2014.

Consolidated Statements of Income



	Year Ended December 31, 2013										Year Ended December 31, 2012
	As Previously Reported		Discontinued Operations			Adjustment			As Revised		As Previously Reported		Discontinued Operations			Adjustment			As Revised
	($ in thousands, except per share amounts)
Royalty fees	$	267,229	$	—		$	583		$	267,812	$	260,782	$	—		$	898		$	261,680
Marketing and reservation revenues	403,099		—			4,534			407,633		384,784		—			4,894			389,678
Hotel operations	4,774		(4,774		)	—			—		4,573		(4,573		)	—			—
Total revenues	724,307		(4,774		)	5,117			724,650		691,509		(4,573		)	5,792			692,728

Selling, general and administrative	113,567		—			(1,854		)	111,713		101,852		—			27			101,879
Depreciation and amortization	9,469		(526		)	113			9,056		8,226		(535		)	—			7,691
Marketing and reservation expenses	403,099		—			4,534			407,633		384,784		—			4,894			389,678
Hotel operations	3,678		(3,678		)	—			—		3,505		(3,505		)	—			—
Total operating expenses	529,813		(4,204		)	2,793			528,402		498,367		(4,040		)	4,921			499,248

Operating income	194,494		(570		)	2,324			196,248		193,142		(533		)	871			193,480

Income from continuing operations before income taxes	156,918		(570		)	2,324			158,672		169,168		(533		)	871			169,506
Income taxes	44,317		(211		)	1,216			45,322		48,481		(198		)	(55		)	48,228
Income from continuing operations, net of income taxes	112,601		(359		)	1,108			113,350		120,687		(335		)	926			121,278

Basic earnings per share, continuing operations	$	1.92	—			$	0.02		$	1.94	$	2.08	—			$	0.01		$	2.09

Diluted earnings per share, continuing operations	$	1.91	(0.01		)	$	0.02		$	1.92	$	2.07	(0.01		)	$	0.02		$	2.08



	Year Ended December 31, 2011
	As Previously Reported		Discontinued Operations			Adjustment		As Revised
	(in thousands, except per share amounts)
Royalty fees	$	245,426	$	—		$	1,049	$	246,475
Marketing and reservation revenues	349,036		—			5,116		354,152
Hotel operations	4,356		(4,356		)	—		—
Total revenues	638,793		(4,356		)	6,165		640,602

Selling, general and administrative	106,404		—			32		106,436
Depreciation and amortization	8,024		(527		)	—		7,497
Marketing and reservation expenses	349,036		—			5,116		354,152
Hotel operations	3,466		(3,466		)	—		—
Total operating expenses	466,930		(3,993		)	5,148		468,085

Operating income	171,863		(363		)	1,017		172,517

Income from continuing operations before income taxes	158,057		(363		)	1,017		158,711
Income taxes	47,661		(135		)	352		47,878
Income from continuing operations, net of income taxes	110,396		(228		)	665		110,833

Basic earnings per share, continuing operations	$	1.86	$	(0.01	)	$	0.01	$	1.86

Diluted earnings per share, continuing operations	$	1.85	$	(0.01	)	$	0.02	$	1.86

Consolidated Balance Sheets



	As of December 31, 2013									As of December 31, 2012
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
	(in thousands)
Receivables	$	53,521		$	28,864		$	82,385		$	52,270		$	27,729		$	79,999
Income taxes receivable	—			—			—			2,732			(531		)	2,201
Deferred income taxes	7,220			19,464			26,684			4,136			22,062			26,198
Total current assets	258,646			48,328			306,974			233,470			49,260			282,730
Property and equipment, at cost, net	66,092			1,760			67,852			51,651			—			51,651
Advances, marketing and reservation activities	19,127			(13,283		)	5,844			42,179			(12,712		)	29,467
Deferred income taxes	20,282			(20,282		)	—			15,418			(15,418		)	—
Total assets	539,899			16,523			556,422			510,772			21,130			531,902
Deferred income taxes	—			5,149			5,149			—			10,864			10,864
Total liabilities	1,004,144			5,149			1,009,293			1,059,676			10,864			1,070,540
Retained earnings	341,649			11,374			353,023			272,260			10,266			282,526
Total shareholders' deficit	(464,245		)	11,374			(452,871		)	(548,904		)	10,266			(538,638		)
Total liabilities and shareholders' deficit	539,899			16,523			556,422			510,772			21,130			531,902

Consolidated Statements of Cash Flows



	Year Ended December 31, 2013									Year Ended December 31, 2012
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
	(in thousands)
Operating Activities
Net income	$	112,601		$	1,108		$	113,709		$	120,687		$	926		$	121,613
Depreciation and amortization	9,469			113			9,582			8,226			—			8,226
Provision for bad debts, net	2,724			19			2,743			2,896			27			2,923
Deferred income taxes	(8,024		)	1,747			(6,277		)	(540		)	(586		)	(1,126		)
Receivables	(6,730		)	(1,169		)	(7,899		)	(5,239		)	(1,568		)	(6,807		)
Advances to/from marketing and reservations, net	42,405			586			42,991			30,313			670			30,983
Income taxes payable/receivable	4,807			(531		)	4,276			(3,193		)	531			(2,662		)
Net cash provided by operating activities	152,040			1,873			153,913			150,122			—			150,122
Investing Activities
Investment in property and equipment	(31,524		)	(1,873		)	(33,397		)	(15,443		)	—			(15,443		)
Net cash used in investing activities	(27,549		)	(1,873		)	(29,422		)	(47,101		)	—			(47,101		)



	Year Ended December 31, 2011
	As Previously Reported			Adjustment			As Revised
	(in thousands)
Operating Activities
Net income	$	110,396		$	665		$	111,061
Provision for bad debts, net	2,160			32			2,192
Deferred income taxes	5,514			352			5,866
Receivables	(7,785		)	(1,979		)	(9,764		)
Advances to/from marketing and reservations, net	623			930			1,553
Net cash provided by operating activities	131,369			—			131,369

Discontinued Operations

In the first quarter of 2014, the Company's management approved a plan to dispose of the three Company owned Mainstay Suites hotels. As a result, the Company has reported the operations related to these three hotels as discontinued operations beginning with our financial results presented in Company’s Form 10-Q for the period ended March 31, 2014. The Company's results of operations for the periods included in this Form 10-K have also been recast to account for these operations as discontinued. For additional information regarding discontinued operations, see Note 27, Discontinued Operations.

Revenue Recognition

The Company enters into franchise agreements to provide franchisees with various marketing services, a centralized reservation system and limited non-exclusive rights to utilize the Company’s registered trade names and trademarks. These agreements typically have an initial term from ten to twenty years with provisions permitting franchisees or the Company to terminate after five, ten, or fifteen years under certain circumstances. In most instances, initial franchise and relicensing fees are recognized upon execution of the franchise agreement because the initial franchise and relicensing fees are non-refundable and the Company is not required to provide initial services to the franchisee prior to hotel opening. The initial franchise and relicensing fees related to executed franchise agreements which include incentives, such as future potential cash rebates or forgivable promissory notes, are deferred and recognized when the incentive criteria are met or the agreement is terminated, whichever occurs first.

The Company may also enter into master development agreements ("MDAs") with developers that grant limited exclusive development rights and preferential franchise agreement terms for one-time, non-refundable fees. When these fees are not contingent upon the number of agreements executed under the MDA, the Company recognizes these up-front fees pro-rata over the MDAs’ contractual life. Fees that are contingent upon the execution of franchise agreements under the MDA are recognized as the franchise agreements are executed.

Royalty and marketing and reservation system revenues, which are typically based on a percentage of gross room revenues or the number of hotel rooms of each franchisee, are recorded when earned and realizable from the franchisee. Franchise fees based on a percentage of gross room revenues are recognized in the same period that the underlying gross room revenues are earned by the Company's franchisees. An estimate of uncollectible revenue is charged to bad debt expense and included in selling, general and administrative ("SG&A") and marketing and reservation expenses in the accompanying consolidated statements of income.

The Company generates procurement services revenues from qualified vendors. Procurement services revenues are generally earned based on the level of goods or services purchased from qualified vendors by hotel franchise owners and hotel guests who stay in the Company’s franchised hotels or based on marketing services provided by the Company on behalf of the qualified vendors to hotel owners and guests. The Company recognizes procurement services revenues when the services are performed or the product is delivered, evidence of an arrangement exists, the fee is fixed and determinable and collectibility is probable. The Company defers the recognition of procurement services’ revenues related to upfront fees. Such upfront fees are generally recognized over a period corresponding to the Company’s estimate of the life of the arrangement.

Marketing and Reservation Revenues and Expenses

The Company’s franchise agreements require the payment of certain marketing and reservation system fees, which are used exclusively by the Company for expenses associated with providing franchise services such as national marketing, media advertising, central reservation systems and technology services. The Company is contractually obligated to expend the marketing and reservation system revenue it collects from franchisees in accordance with the franchise agreements; as such, no income or loss to the Company is generated. In accordance with the franchise agreements, the Company includes in marketing and reservation expenses an allocation of costs for certain activities, such as human resources, facilities, legal, accounting, etc., required to carry out marketing and reservation activities.

The Company records marketing and reservation system revenues and expenses on a gross basis since the Company is the primary obligor in the arrangement, maintains the credit risk, establishes the price and nature of the marketing or reservation services and retains discretion in supplier selection. In addition, net advances to and recoveries from the franchise system for marketing and reservation activities are presented as cash flows from operating activities.

Marketing and reservation system revenues not expended in the current year are recorded as a liability in the Company's balance sheet and are carried over to the next fiscal year and expended in accordance with the franchise agreements. Shortfall amounts are recorded as an asset in the Company's balance sheet, with a corresponding reduction in costs, and are similarly recovered in subsequent years. Under the terms of the franchise agreements, the Company may advance capital and incur costs as necessary for marketing and reservation activities and recover such advances through future fees. The Company’s current assessment is that the credit risk associated with the cumulative cost advances for marketing and reservation system activities is mitigated due to the contractual right to recover these amounts from a large geographically dispersed group of franchisees.

The Company evaluates the recoverability of marketing and reservation costs incurred in excess of cumulative marketing and reservation system revenues earned on a periodic basis. The Company will record a reserve when, based on current information and events, it is probable that it will be unable to collect all amounts advanced for marketing and reservation activities according to the contractual terms of the franchise agreements. These advances are considered to be unrecoverable if the expected net, undiscounted cash flows from marketing and reservation activities are less than the carrying amount of the asset. Based on the Company’s analysis of projected net cash flows from marketing and reservation activities for all periods presented, the Company concluded that the cumulative advances for marketing and reservation activities was fully recoverable and as a result no reserve for possible losses was recorded.

Choice Privileges is the Company’s frequent guest incentive marketing program. Choice Privileges enables members to earn points based on their spending levels with franchisees and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by credit card companies. The points, which the Company accumulates and tracks on the members’ behalf, may be redeemed for free accommodations or other benefits.

The Company provides Choice Privileges as a marketing program to franchised hotels and collects a percentage of program members’ room revenue from franchises to operate the program. Revenues are deferred in an amount equal to the estimated fair value of the future redemption obligation. The Company develops an estimate of the eventual redemption rates and point values using various actuarial methods. These judgmental factors determine the required liability attributable to outstanding points. Upon redemption of points, the Company recognizes the previously deferred revenue as well as the corresponding expense relating to the cost of the awards redeemed. Revenues in excess of the estimated future redemption obligation are recognized when earned to reimburse the Company for costs incurred to operate the program, including administrative costs, marketing, promotion, and performing member services.

Accounts Receivable and Credit Risk

Accounts receivable consist primarily of franchise and related fees due from hotel franchises and are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable. The Company determines the allowance considering historical write-off experience and a review of aged receivable balances. However, the Company considers its credit risk associated with trade receivables to be partially mitigated due to the dispersion of these receivables across a large number of geographically diverse franchisees.

The Company records bad debt expense in SG&A and marketing and reservation expenses in the accompanying consolidated statements of income based on its assessment of the ultimate realizability of trade receivables considering historical collection experience and the economic environment. When the Company determines that an account is not collectible, the account is written-off to the associated allowance for doubtful accounts.

Advertising Costs

The Company expenses advertising costs as the advertising occurs. Advertising expense was $84.7 million, $79.7 million and $73.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. Prepaid advertising at December 31, 2013 and 2012 totaled $0.2 million and $0.5 million, respectively and is included within other current assets in the accompanying consolidated balance sheets. The Company includes advertising costs primarily in marketing and reservation expenses on the accompanying consolidated statements of income.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. At both December 31, 2013 and 2012, the Company had book overdrafts totaling $5.0 million which are included in accounts payable in the accompanying consolidated balance sheets. These book overdrafts represent outstanding checks in excess of funds on deposit.

The Company maintains cash balances in domestic banks, which, at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation. In addition, the Company also maintains cash balances in international banks which do not provide deposit insurance.

Capitalization Policies

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or their useful lives. Major renovations and replacements incurred during construction are capitalized. Additionally, the Company capitalizes any interest incurred during construction; however, for the years ended December 31, 2013 and 2012, no interest was capitalized. Upon sale or retirement of property, the cost and related accumulated depreciation are eliminated from the accounts and any related gain or loss is recognized in the accompanying consolidated statements of income. Maintenance, repairs and minor replacements are charged to expense as incurred.

Costs for computer software developed for internal use are capitalized during the application development stage and depreciated using the straight-line method over the estimated useful lives of the software.

Leased property meeting certain capital lease criteria is capitalized and the present value of the related lease payments is recorded as a liability. The present value of the minimum lease payments are calculated utilizing the lower of the Company’s incremental borrowing rate or the lessor’s interest rate implicit in the lease, if known by the Company. Amortization of capitalized leased assets is computed utilizing the straight-line method over either the shorter of the estimated useful life of the asset or the initial lease term and included in depreciation and amortization in the Company's consolidated statements of income. However, if the lease meets the bargain purchase or transfer of ownership criteria the asset shall be amortized in accordance with the Company’s normal depreciation policy for owned assets.

Assets Held for Sale

The Company considers property to be assets held for sale when all of the following criteria are met:


•	Management commits to a plan to sell an asset;


•	It is unlikely that the disposal plan will be significantly modified or discontinued;


•	The asset is available for immediate sale in its present condition;


•	Actions required to complete the sale of the asset have been initiated;


•	Sale of the asset is probable and the Company expects the completed sale will occur within one year; and


•	The asset is actively being marketed for sale at a price that is reasonable given its current market value.

Upon designation as an asset held for sale, the Company records the carrying value of each asset at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and ceases recording depreciation. If at any time these criteria are no longer met, subject to certain exceptions, the assets previously classified as held for sale are reclassified as held and used and measured individually at the lower of the following:


a.	the carrying amount before the asset was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the asset been continuously classified as held and used;


b.	the fair value at the date of the subsequent decision not to sell.

Valuation of Intangibles and Long-Lived Assets

The Company evaluates the potential impairment of property and equipment and other long-lived assets, including franchise rights and other definite-lived intangibles, on an annual basis or whenever an event or other circumstances indicates that the Company may not be able to recover the carrying value of the asset. Recoverability is measured based on net, undiscounted expected cash flows. Assets are considered to be impaired if the net, undiscounted expected cash flows are less than the carrying amount of the assets. Impairment charges are recorded based upon the difference between the carrying value and the fair value of the asset. During the year ended December 31, 2012, the Company recognized an impairment loss totaling $0.2 million on the franchise rights recorded in conjunction with its India acquisition. The franchise rights were determined to be impaired as the net, undiscounted expected cash flows were less than the carrying amount of the assets. The Company did not record any impairment of long-lived assets during the years ended December 31, 2013 and 2011. Significant management judgment is involved in developing these projections, and they include inherent uncertainties. If different projections had been used in the current period, the balances for non-current assets could have been materially impacted. Furthermore, if management uses different projections or if different conditions occur in future periods, future-operating results could be materially impacted.

The Company evaluates the impairment of goodwill and trademarks with indefinite lives on an annual basis, or during the year if an event or other circumstance indicates that the Company may not be able to recover the carrying amount of the asset. In evaluating these assets for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the conclusion is that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, then no further testing is required. If the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step impairment test is performed. The fair value of the Company's net assets is used to determine if goodwill may be impaired. Indefinite life trademarks are considered to be impaired if the net, undiscounted expected cash flows associated with the trademark are less than their carrying amount. During the year ended December 31, 2012, the Company recognized an impairment loss totaling $0.2 million on the goodwill recorded in conjunction with its India acquisition. Based on the Company's assessment, it was determined that the fair value of the Company's Indian subsidiary, was less than its carrying value resulting in the recognition of an impairment loss equal to the gross amount of the goodwill. The Company did not record any impairment of goodwill or trademarks with indefinite lives during the years ended December 31, 2013 and 2011.

Variable Interest Entities

In accordance with the guidance for the consolidation of variable interest entities, the Company analyzes its variable interests, including loans, guarantees, and equity investments, to determine if the entity in which the Company has a variable interest is a variable interest entity. The analysis includes both quantitative and qualitative reviews. For those entities determined to have variable interests, a further quantitative and qualitative analysis is performed to determine if the Company will be deemed the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. The Company consolidates those entities in which it is determined to be the primary beneficiary.

Valuation of Investments in Ventures

The Company evaluates an investment in a venture for impairment when circumstances indicate that the carrying value may not be recoverable, for example due to loan defaults, significant under performance relative to historical or projected operating performance, and significant negative industry or economic trends. When there is indication that a loss in value has occurred, the Company evaluates the carrying value compared to the estimated fair value of the investment. Fair value is based upon internally developed discounted cash flow models, third-party appraisals, and if appropriate, current estimated net sales proceeds from pending offers. If the estimated fair value is less than carrying value, management uses its judgment to determine if the decline in value is other-than-temporary. In determining this, the Company consider factors including, but not limited to, the length of time and extent of the decline, loss of values as a percentage of the cost, financial condition and near-term financial projections, the Company's intent and ability to recover the lost value and current economic conditions. For investments that are deemed other-than-temporary, impairments are charged to earnings.

Sales Taxes

The Company presents taxes collected from customers and remitted to governmental authorities on a net basis and therefore they are excluded from revenues in the consolidated financial statements.

Foreign Operations

The United States dollar is the functional currency of the consolidated entities operating in the United States. The functional currency for the consolidated entities operating outside of the United States is generally the currency of the primary economic environment in which the entity primarily generates and expends cash. The Company translates the financial statements of consolidated entities whose functional currency is not the United States dollar into United States dollars. The Company translates assets and liabilities at the exchange rate in effect as of the financial statement date and translates income statement accounts using the weighted average exchange rate for the period. The Company includes translation adjustments from foreign exchange and the effect of exchange rate changes on inter-company transactions of a long-term investment nature as a separate component of shareholders’ deficit. The Company reports foreign currency transaction gains and losses and the effect of inter-company transactions of a short-term or trading nature in SG&A expenses on the consolidated statements of income. Foreign currency transaction gains and losses for the years ended December 31, 2013, 2012 and 2011 were a $0.4 million loss, $0.1 million gain and a $1.4 million loss, respectively.

Derivatives

The Company periodically uses derivative instruments as part of its overall strategy to manage exposure to market risks associated with fluctuations in interest rates. All outstanding derivative financial instruments are recognized at their fair values as assets or liabilities. The impact on earnings from recognizing the fair values of these instruments depends on their intended use, their hedge designation and their effectiveness in offsetting changes in the fair values of the exposures they are hedging. The Company does not use derivatives for trading purposes.

The effective portion of changes in fair value of derivatives designated as cash flow hedging instruments are recorded as a component of accumulated other comprehensive income (loss) and the ineffective portion is reported currently in earnings. The amounts included in accumulated other comprehensive income are reclassified into earnings in the same period during which the hedged item affects earnings. Amounts reported in earnings are classified consistent with the item being hedged.

The Company formally documents all relationships between its hedging instruments and hedged items at inception, including its risk management objective and strategy for establishing various hedge relationships. Cash flows from hedging instruments are classified in the consolidated statements of cash flows consistent with the items being hedged.

Hedge accounting is discontinued prospectively when (i) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item, (ii) the derivative instrument expires, is sold, terminated or exercised, or (iii) designating the derivative instrument as a hedge is no longer appropriate. The effectiveness of derivative instruments is assessed at inception and on an ongoing basis.

Guarantees

The Company has historically issued certain guarantees to support the growth of its brands. A liability is recognized for the fair value of such guarantees upon inception of the guarantee and upon any subsequent modification, such as renewals, when the Company remains contingently liable. The fair value of a guarantee is the estimated amount at which the liability could be settled in a current transaction between willing unrelated parties. The Company evaluates these guarantees on a quarterly basis.

Recently Adopted Accounting Guidance

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" (“ASU 2013-02”). This update requires companies to present either in a single note or parenthetically on the face of the financial statements the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety companies would instead cross reference to the related footnote for additional information. ASU 2013-02 became effective for interim and annual periods beginning after December 15, 2012 and the Company adopted this ASU during the first quarter of 2013. The Company has elected to present the required disclosures in a single note rather than on the face of the financial statement. See Note 19 for additional information.