WeightWatchers 2006 Annual Report Download - page 44

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, share-based compensation, 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, such as Monthly Pass and Season Pass, 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. In accordance with SFAS No. 141, “Business Combinations” and SFAS No. 142,
“Goodwill and Other Intangible Assets,” we review these assets for potential impairment on at least an annual
basis. We performed fair value impairment testing as of December 30, 2006 and December 31, 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 and interest rates. 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 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
are appropriate.
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