GNC 2011 Annual Report Download - page 84

Table of Contents
NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
at wholesale prices. Revenue on product sales to franchisees is recognized when risk of loss, title and insurable risks have transferred to the franchisee.
Franchise fees are recognized by the Company at the time of a franchise store opening. Interest on the financing of franchisee notes receivable is recognized
as it becomes due and payable. Gains from the sale of company-owned stores to franchisees are recognized in accordance with the standard on accounting for
sales of real estate. This standard requires gains on sales of corporate stores to franchisees to be deferred until certain criteria are satisfied regarding the
collectability of the related receivable and the seller's remaining obligations. Remaining sources of franchise income, including royalties, are recognized as
earned.
The Manufacturing/Wholesale segment sells product primarily to the other Company segments and third-party customers. Revenue is recognized when
risk of loss, title and insurable risks have transferred to the customer, net of estimated returns and allowances. The Company also has a consignment
arrangement with certain customers and revenue is recognized when products are sold to the ultimate customer.
Cost of Sales. The Company purchases products directly from third-party manufacturers as well as manufactures its own products. The Company's
cost of sales includes product costs, costs of warehousing and distribution and occupancy costs. The cost of manufactured products includes depreciation
expense related to the manufacturing facility and related equipment.
Vendor Allowances. The Company enters into two main types of arrangements with certain vendors, the most significant of which results in the
Company receiving credits as sales rebates based on arrangements with such vendors. The Company also enters into arrangements with certain vendors
through which the Company receives rebates for purchases during the year typically based on volume discounts. As the right of offset exists under these
arrangements, rebates received under both arrangements are recorded as a reduction in the vendors' accounts payable balances on the balance sheet and
represent the estimated amounts due to GNC under the rebate provisions of such contracts. The corresponding rebate income is recorded as a reduction of cost
of goods sold based on inventory turnover, in accordance with the provisions of the standard on accounting by a reseller for cash consideration received from
a vendor. For volume rebates, the appropriate level of such income is derived from the level of actual purchases made by GNC from suppliers. The amount
recorded as a reduction to cost of goods sold was $40.0 million, $34.1 million, and $29.3 million for the years ended December 31, 2010, 2009 and 2008,
respectively.
Distribution and Shipping Costs. The Company bills franchisees and third-party customers shipping and transportation costs and reflects these
charges in revenue. The unreimbursed costs that are associated with these costs are included in cost of sales.
Research and Development. Research and development costs arising from internally generated projects are expensed by the Company as incurred.
The Company recognized $0.5 million, $0.4 million, and $0.9 million for the years ended December 31, 2010, 2009 and 2008, respectively. These costs are
included in Other SG&A costs in the accompanying financial statements.
Advertising Expenditures. The Company recognizes advertising, promotion and marketing program costs the first time the advertising takes place
with exception to the costs of producing advertising, which are expensed as incurred during production. The Company administers national advertising funds
on behalf of its franchisees. In accordance with the franchisee contracts, the
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