GNC 2010 Annual Report Download - page 83

Table of Contents
GENERAL NUTRITION CENTERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Inventories. Inventory components consist of raw materials, finished product and packaging supplies. Inventories are stated at the lower
of cost or market on a first in/first out basis. Cost is determined using a standard costing system which approximates actual costs. The
Company regularly reviews its inventory levels in order to identify slow moving and short dated products, expected length of time for product
sell through and future expiring product. Upon analysis, the Company has established certain valuation allowances to reserve for such
inventory. When allowances are considered necessary, after such reviews, the inventory balances are adjusted and reflected net in the
accompanying financial statements.
Accounts Receivable and Allowance for Doubtful Accounts. The Company sells product to its franchisees and, to a lesser extent,
various third parties. See Note 3, "Receivables", for the components of accounts receivable. To determine the allowance for doubtful accounts
in accordance with the standard on impairment of receivables, factors that affect collectability from the Company's franchisees or third-party
customers include their financial strength, payment history, reported sales and the overall retail economy. The Company establishes an
allowance for doubtful accounts for franchisees based on an assessment of the franchisees' operations which includes analysis of their
operating cash flows, sales levels, and status of amounts due to the Company, such as rent, interest and advertising. In addition, the Company
considers the franchisees' inventory and fixed assets, which the Company can use as collateral in the event of a default by the franchisee. An
allowance for international franchisees is calculated based on unpaid, non collateralized amounts associated with their receivable balance. An
allowance for receivable balances due from third parties is recognized, if considered necessary, based on facts and circumstances. These
allowances are deducted from the related receivables and reflected net in the accompanying financial statements.
Notes Receivable. The Company offers financing to qualified franchisees in connection with the initial purchase of a franchise store. The
notes offered by the Company to its franchisees are demand notes, payable monthly over a period ranging from five to seven years. Interest
accrues principally at an annual rate that ranges from 8.0% to 13.75%, based on the amount of initial deposit, and is payable monthly.
Allowances for these receivables are recognized in accordance with the Company's policy described in the Accounts Receivable and Allowance
for Doubtful Accounts above.
Property, Plant and Equipment. Property, plant and equipment expenditures are recorded at cost. As a result of the Merger, the
remaining estimated useful lives of already-existing property and equipment were reevaluated on a prospective basis using the fair values
determined at the date of the Merger. These remaining useful lives ranged from one year to sixteen years across all asset classes with the
exception of buildings, whose useful lives ranged from fifteen to thirty seven years. Depreciation and amortization are recognized using the
straight-line method over the estimated useful life of the property. Fixtures are depreciated over three to fifteen years, and equipment is
generally depreciated over ten years. Computer equipment and software costs are generally depreciated over three to five years. Amortization
of improvements to retail leased premises is recognized using the straight-line method over the estimated useful life of the improvements, or
over the life of the related leases including renewals that are reasonably assured, whichever period is shorter. Buildings are depreciated over
forty years and building improvements are depreciated over the remaining useful life of the building. The Company records tax depreciation in
conformity with the provisions of applicable tax law.
Expenditures that materially increase the value or clearly extend the useful life of property, plant and equipment are capitalized in
accordance with the policies outlined above. Repair and maintenance costs incurred in the normal operations of business are expensed as
incurred. Gains from the sale of property, plant and equipment are recognized in current operations.
The Company recognized depreciation expense of property, plant and equipment of $36.9 million for the year ended December 31, 2009,
$31.6 million for the year ended December 31, 2008, $20.8 million for the period March 16 to December 31, 2007, and $6.5 million for the
period January 1 to March 15, 2007.
Goodwill and Intangible Assets. Goodwill represents the excess of purchase price over the fair value of identifiable net assets of
acquired entities. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least
annually. The Company completes its annual impairment test in the fourth quarter. The Company records goodwill and franchise rights upon
the acquisition of franchisee stores when the consideration given to the franchisee
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