WeightWatchers 2009 Annual Report Download - page 52

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carrying amounts. In the event such a decrease occurred, 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.
In performing the impairment analysis for franchise rights acquired, the fair value for our franchise rights
acquired is estimated using a discounted cash flow approach. This approach involves projecting future cash flows
attributable to the franchise rights acquired and discounting those estimated cash flows using an appropriate
discount rate. The estimated fair value is then compared to the carrying value of the unit of accounting for those
franchise rights. In determining the appropriate unit of accounting, we have concluded that the unit of accounting
for each franchise right acquired is the country corresponding to the acquired franchise territory. The carrying
values of these franchise rights acquired in the United States, Canada, United Kingdom, Australia/New Zealand
and other countries at January 2, 2010 were $656.6 million, $68.6 million, $14.6 million, $13.2 million and $5.6
million, respectively, totaling $758.6 million.
We estimate future cash flows for each unit of accounting by utilizing the historical cash flows attributable
to the rights in that country and then applying a growth rate using a blend of the historical operating income
growth rates for such country and expected future operating income growth rates for such country. We utilize
operating income as the basis for measuring our potential growth because we believe it is the best indicator of the
performance of our business. For fiscal 2009, the blended growth rates used in our discounted cash flow analysis
ranged from zero to a growth of approximately 11%. For fiscal 2008, the blended growth rates used in our
discounted cash flow analysis ranged from a decline of approximately 2.0% to a growth of approximately 8.5%.
We then discount the estimated future cash flows utilizing a discount rate. The discount rate is calculated using
the weighted average cost of capital, which includes the cost of equity and the cost of debt. The cost of equity is
determined by combining a risk-free rate of return and a market risk premium. The risk-free rate of return is
generally determined based on the average rate of long-term Treasury securities. The market risk premium is
generally determined by reviewing external market data. When appropriate, we further adjust the resulting
combined rate to account for certain entity-specific factors such as maturity of the market in order to determine
the utilized discount rate. The cost of debt is our average borrowing rate for the period. The discount rates used in
our fiscal 2009 year-end impairment test and our fiscal 2008 impairment test as tested in the third quarter of
fiscal 2009 averaged approximately 11.5% and 10.8%, respectively.
At the end of fiscal 2009, we estimated that approximately 90% of the carrying value of our franchise rights
acquired had a fair value of at least three times their respective carrying amounts. In the United States, our region
which held approximately 87% of the franchise rights acquired, the aggregate fair value of our franchise rights
acquired was approximately three times the aggregate carrying value. Given that there is a significant difference
between the fair value and carrying value of our franchise rights acquired, we believe there are currently no
reasonably likely changes in assumptions that would cause an impairment.
Derivative Instruments and Hedging
We enter into interest rate swaps to hedge a substantial portion of our variable rate debt. We record all
derivative financial instruments 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.
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.
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