Supercuts 2008 Annual Report Download - page 90

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. ACQUISITIONS, INVESTMENTS IN AFFILIATES AND LOANS (Continued)
(2) On January 31, 2008 the Company merged its continental European franchise salon operations with the Franck Provost Salon Group.(2)
(3)
Related to FIN No. 48, the Company recorded a $3.9 million adjustment to goodwill to account for preacquisition tax positions at the
Company's hair restoration centers segment.
The majority of the purchase price in salon acquisitions is accounted for as residual goodwill rather than identifiable intangible assets. This
stems from the value associated with the walk-in customer base of the acquired salons, which is not recorded as an identifiable intangible asset
under current accounting guidance, as well as the limited value and customer preference associated with the acquired hair salon brand. Key
factors considered by consumers of hair salon services include personal relationships with individual stylists, service quality and price point
competitiveness. These attributes represent the "going concern" value of the salon.
Residual goodwill further represents the Company's opportunity to strategically combine the acquired business with the Company's existing
structure to serve a greater number of customers through its expansion strategies. In the acquisitions of international salons and hair restoration
centers, the residual goodwill primarily represents the growth prospects that are not captured as part of acquired tangible or identified intangible
assets. Generally, the goodwill recognized in the North American salon transactions is expected to be fully deductible for tax purposes and the
goodwill recognized in the international salon transactions is non-
deductible for tax purposes. Goodwill generated in certain acquisitions, such as
the acquisition of hair restoration centers, is not deductible for tax purposes due to the acquisition structure of the transaction.
During fiscal years 2008 and 2007, the Company purchased salon operations from its franchisees. The Company evaluated the effective
settlement of the preexisting franchise contracts and associated rights afforded by those contracts in accordance with Emerging Issues Task
Force (EITF) No. 04-1, Accounting for Preexisting Relationships Between the Parties to a Business Combination.
The Company determined that
the effective settlement of the preexisting franchise contracts at the date of the acquisition did not result in a gain or loss, as the agreements were
neither favorable nor unfavorable when compared to similar current market transactions, and no settlement provisions exist in the preexisting
contracts. Therefore, no settlement gain or loss was recognized with respect to the Company's franchise buybacks.
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