WeightWatchers 2004 Annual Report Download - page 27

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Hedging Instruments
We enter into forward and swap contracts to hedge transactions denominated in foreign currencies
in order to reduce currency risk associated with fluctuating exchange rates. These contracts have been
used primarily to hedge payments arising from some of our foreign currency denominated obligations.
In addition, we enter into interest rate swaps to hedge a substantial portion of our variable rate debt.
We account for our hedging instruments under the provisions of SFAS No. 133, ‘‘Accounting for
Derivative Instruments and Hedging Activities,’’ which requires that all derivative financial instruments
be recorded on the consolidated balance sheet at fair value as either assets or liabilities. Fair value
adjustments for qualifying derivative instruments are recorded as a component of other comprehensive
income and will be included in earnings in the periods in which earnings are affected by the hedged
item. Fair value adjustments for non-qualifying derivative instruments are recorded in our results of
operations.
Consolidation Under FIN 46R
On January 17, 2003, the Financial Accounting Standards Board (‘‘FASB’’) issued Interpretation
No. 46 (‘‘FIN 46’’), to clarify when an entity should consolidate another entity known as a variable
interest entity (‘‘VIE’’). The standard required that, under certain circumstances, separate businesses
with some common ownership be consolidated for financial reporting purposes. Upon adoption of the
original FIN 46, we did not meet those circumstances, and we therefore did not consolidate
WeightWatchers.com’s financial statements into our 2003 and prior reported financial statements.
On December 24, 2003, the FASB issued FIN 46R, which replaced FIN 46. FIN 46R is applicable
for financial statements issued for reporting periods after March 15, 2004. FIN 46R requires that an
entity consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the
VIE’s expected losses, will receive a majority of the VIE’s expected residual returns, or both.
Based on the revisions in FIN 46R, we were required to reevaluate our relationship with our
affiliate and licensee, WeightWatchers.com. In the course of this reevaluation, we determined that
WeightWatchers.com was a variable interest entity under FIN 46R and that we were its primary
beneficiary under this regulation. Effective April 3, 2004, we consolidated WeightWatchers.com. In
accordance with the provisions of FIN 46R, we recorded a charge of $11.9 million, including a tax
charge of $9.9 million, in the fiscal quarter ended April 3, 2004 for the cumulative effect of this
accounting change. This charge reflects the cumulative impact to our results of operations had
WeightWatchers.com been consolidated since its inception in September 1999. Beginning in our first
fiscal quarter ended April 3, 2004, our consolidated balance sheet includes the balance sheet of
WeightWatchers.com. Effective at the beginning of the second fiscal quarter of 2004, our consolidated
statement of operations and statement of cash flows include the results of WeightWatchers.com. All
intercompany balances have been eliminated in consolidation.
Income Taxes
Deferred income taxes result primarily from temporary differences between financial and tax
reporting. If it is more likely than not that some portion of a deferred tax asset will not be realized, a
valuation allowance is recognized. We consider historic levels of income, estimates of future taxable
income and feasible tax planning strategies in assessing the need for a tax valuation allowance. We also
establish an appropriate level of additional provisions for income taxes in the event that certain
positions, which we believe are fully supportable, are challenged by the tax authorities. We adjust these
additional provisions in light of changing facts and circumstances. If our filing positions are ultimately
upheld under audits by respective taxing authorities, the provision for income taxes in future years will
reflect favorable adjustments.
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