WeightWatchers 2005 Annual Report Download - page 39

Critical Accounting Policies
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ is
based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). The
preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those
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 and estimates.
Revenue Recognition
We earn revenue by conducting meetings, selling products in our meetings and to our franchisees,
selling Internet subscription products, collecting commissions from franchisees, 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 in our meeting business. 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 meeting fees 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 primarily generates revenue from monthly Internet subscriptions. 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 of the refund 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
December 31, 2005 and January 1, 2005 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
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