WeightWatchers 2007 Annual Report Download - page 46

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(“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
strategies in assessing the need for a tax valuation allowance.
On December 31, 2006, the first day of its 2007 fiscal year, the Company adopted the provisions of FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement
No. 109”, or FIN 48. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those
benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by
taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50
percent likely of being realized upon ultimate settlement. As a result of the December 31, 2006 adoption of FIN
48, the Company increased its tax liability for unrecognized tax benefits by $1.9 million, which was accounted
for as a reduction to the opening balance of retained earnings for fiscal 2007.
Capitalized Software Development
We follow the provisions of AICPA Statement of Position 98-1, “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use”, which requires the capitalization of certain costs incurred in
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