WeightWatchers 2005 Annual Report Download - page 40

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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 would also be required to reduce the carrying amounts of the related assets on
our balance sheet. 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.
Derivative Instruments and Hedging
Prior to the extinguishment of our euro denominated 13% Senior Subordinated Notes in 2004, we
entered 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 were used
primarily to hedge payments arising from those foreign currency denominated obligations. We currently
enter into interest rate swaps to hedge a substantial portion of our variable rate debt. These contracts
are used primarily to reduce the risk associated with variable interest rate debt obligations.
We account for our hedging instruments under the provisions of SFAS No. 133, ‘‘Accounting for
Derivative Instruments and Hedging Activities,’’ and its related amendments, SFAS No. 138,
‘‘Accounting for Certain Derivative Instruments and Certain Hedging Activities’’ and SFAS No. 149,
‘‘Amendment of Statement on Derivative Instruments and Hedging Activities,’’ which require 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
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 VIE 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 quarter of fiscal 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.
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