WeightWatchers 2004 Annual Report Download - page 26

related to inventories, the impairment analysis for goodwill and other indefinite-lived intangible assets,
income taxes, and contingencies and litigation. We base our estimates on historical experience and on
various other factors and assumptions that we believe to be reasonable under the circumstances, the
results of which form the bases for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following accounting policies are most important to the portrayal of our financial
condition and results of operations and require our most significant judgments.
Revenue Recognition
We earn revenue by conducting meetings, selling products and aids in our meetings and to our
franchisees, collecting commissions from franchisees operating under the Weight Watchers name,
collecting royalties related to licensing agreements and selling advertising space in and copies of our
magazine. We charge non-refundable registration fees in exchange for an introductory information
session and materials we provide to new members. Revenue from these registration fees is recognized
when the service and products are provided, which is generally at the same time payment is received
from the customer. Revenue from meeting fees, product sales, commissions and royalties is recognized
when services are rendered, products are shipped to customers and title and risk of loss pass to the
customer, and commissions and royalties are earned. Advertising revenue is recognized when ads are
published. Revenue from magazine sales is recognized when the magazine is sent to the customer.
Deferred revenue, consisting of prepaid lecture and magazine subscription revenue, is amortized into
income over the period earned. Discounts to customers, including free registration offers, are recorded
as a deduction from gross revenue in the period such revenue was recognized. WeightWatchers.com
generates revenue from monthly subscriptions to its web site. Subscription fee revenues are recognized
over the period that products are provided. One time sign up fees are deferred and recognized over the
expected customer relationship period. Subscription fee revenues that are paid in advance are deferred
and recognized on a straight-line basis over the subscription period. We grant refunds under limited
circumstances and at aggregate amounts that historically have not been material. Because the period of
payment generally approximates the period revenue was originally recognized, refunds are recorded as
a reduction of revenue when paid.
Goodwill and Other Indefinite-lived Intangible Assets
Finite-lived intangible assets are being amortized using the straight-line method over their
estimated useful lives of three to 20 years. Effective December 30, 2001, we adopted SFAS No. 141,
‘‘Business Combinations’’ and SFAS No. 142, ‘‘Goodwill and Other Intangible Assets.’’ As a result, we
no longer amortize goodwill and other indefinite-lived intangible assets, but instead, review these assets
for potential impairment on at least an annual basis. We performed fair value impairment testing as of
January 1, 2005 and January 3, 2004 on our goodwill and other indefinite-lived intangible assets and
determined that the carrying amounts of these assets did not exceed their respective fair values and
therefore, no impairment existed. When determining fair value, we utilize various assumptions,
including projections of future cash flows. A change in these underlying assumptions will cause a
change in the results of the tests and, as such, could cause fair value to be less than the carrying
amounts. Upon such an event, we would be required to record a corresponding charge, which would
impact earnings. We continue to evaluate these estimates and assumptions and believe that these
assumptions, which included an estimate of future cash flows based upon the anticipated performance
of the underlying business units, were appropriate.
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