Supercuts 2005 Annual Report Download - page 67

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and
equipment are computed on the straight-line method over estimated useful asset lives (30 to 39 years for buildings and improvements and five
to ten years for equipment, furniture, software and leasehold improvements). Leasehold improvements are amortized over the shorter of their
estimated useful lives or the related lease term, generally ten years. For leases with renewal periods at the Company’
s option, management may
determine at the inception of the lease that renewal is reasonably assured if failure to exercise a renewal option imposes an economic penalty to
the Company. In such cases, the Company will include the renewal option period along with the original lease term in the determination of
appropriate estimated useful lives.
The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use. Costs incurred to
develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs
associated with internal-
use software are expensed as incurred. At June 30, 2005 and 2004, the net book value of capitalized software costs was
$24.9 and $21.6 million, respectively. Amortization expense related to capitalized software was $6.6, $5.8 and $5.8 million in fiscal years
2005, 2004 and 2003, respectively, which has been determined based on an estimated useful life of five or seven years.
Expenditures for maintenance and repairs and minor renewals and betterments which do not improve or extend the life of the respective
assets are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization
accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operations. Fully depreciated/amortized
assets remain in the accounts until retired from service.
Goodwill:
Goodwill is tested for impairment annually or at the time of a triggering event in accordance with the provisions of Statement of Financial
Accounting Standards (FAS) No. 142, “Goodwill and Other Intangible Assets.” Fair values are estimated based on the Company’s best
estimate of the expected present value of future cash flows and compared with the corresponding carrying value of the reporting unit, including
goodwill. The Company generally considers its various concepts to be reporting units when it tests for goodwill impairment because that is
where the Company believes goodwill naturally resides. During the third quarter of each of the three fiscal years in the period ending June 30,
2005, goodwill was tested for impairment in this manner. During fiscal years 2004 and 2003, the estimated fair value of the reporting units
exceeded their carrying amounts, indicating no impairment of goodwill.
During the quarter ending March 31, 2005, the Company reduced its expectations for the European business based on recent growth
trends. Based on the results of its third quarter fiscal year 2005 goodwill impairment testing, which factored in these revised growth trend
expectations, the Company wrote down the carrying value of the European business to reflect its estimated fair value. As a result, it recorded a
pre-tax, non-cash charge of $38.3 million during the third quarter.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment at the salon level annually or if events or circumstances indicate that the carrying
value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows
expected to result from use of the assets compared to its carrying value. If an impairment is recognized, the carrying value of the impaired asset
is reduced to its fair value, based on discounted estimated future cash flows.
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