WeightWatchers 2006 Annual Report Download - page 45

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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 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.
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 fiscal 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.
As discussed above, WeightWatchers.com is now a wholly-owned subsidiary of Weight Watchers
International. Therefore, we consolidate 100% of the results of WeightWatchers.com under the traditional rules
of consolidation rather than under the provisions of FIN 46R. Since we adopted FIN 46R on the last day of the
first quarter of fiscal 2004, commencing in the second quarter of fiscal 2005 and forward, our quarterly
consolidated results are comparable with respect to the inclusion of WeightWatchers.com’s results.
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
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