GNC 2011 Annual Report Download - page 83

Table of Contents
NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 exceeds the fair value of the identifiable assets acquired and liabilities assumed of the store. This goodwill is accounted
for in accordance with the above policy. See Note 7, "Goodwill, Brands, and Other Intangible Assets, Net".
Long-lived Assets. The Company periodically performs reviews of underperforming businesses and other long-lived assets, including amortizable
intangible assets, for impairment pursuant to the provisions of the standard related to the accounting for impairment on disposal of long lived assets. Factors
the Company considers important that may trigger an impairment review include: significant changes in the manner of its use of assets of the strategy for its
overall business; significant negative industry or economic trends; store closings; or under-performing business trends. These reviews may include an analysis
of the current operations and capacity utilization, in conjunction with an analysis of the markets in which the businesses are operating. A comparison is
performed of the undiscounted projected cash flows of the current operating forecasts to the net book value of the related assets. If it is determined that the full
value of the assets may not be recoverable, an appropriate charge to adjust the carrying value of the long-lived assets to fair value may be required.
Revenue Recognition. The Company operates predominately as a retailer, through company-owned stores, franchise stores and sales through its
website, GNC.com and to a lesser extent through wholesale operations.
The Retail segment recognizes revenue at the moment a sale to a customer is recorded. These revenues are recorded via the Company's point of sale
system. Gross revenues are netted against actual customer returns and an allowance for expected customer returns. The Company records a reserve for
expected customer returns based on management's estimate, which is derived from historical return data. Revenue is deferred on sales of the Company's Gold
Cards and subsequently amortized over 12 months. The length of the amortization period is determined based on matching the discounts associated with the
Gold Card program to the revenue deferral during the 12 month membership period. For an annual fee, the card provides customers with a 20% discount on
all products purchased, both on the date the card is purchased and certain specified days of every month.
The Company also sells gift cards to its customers. Revenue from gift cards is recognized when the gift card is redeemed. These gift cards do not have
expiration dates. Based upon historical redemption rates, a small percentage of gift cards will never be redeemed, referred to as "breakage". The Company
first sold gift cards in late 2001 and the Company began to recognize gift card breakage revenue in 2008, when the likelihood of redemption became remote
and amounts were not escheatable. Total revenue includes $0.3 million for each of the years ended December 31, 2010 and 2009, and $0.6 million for the year
ended December 31, 2008 related to recognition of gift card breakage revenue.
The Franchise segment generates revenues through product sales to franchisees, royalties, franchise fees and interest income on the financing of the
franchise locations. See Note 20, "Franchise Revenue". These revenues are netted by actual franchisee returns and an allowance for projected returns. The
franchisees purchase a majority of the products they sell from the Company
78