WeightWatchers 2009 Annual Report Download - page 81

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, the Company has
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 $656,638, $68,602,
$14,570, $13,201 and $5,606, respectively, totaling $758,617.
The Company estimates 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. The
Company utilizes operating income as the basis for measuring our potential growth because it believes it is the
best indicator of the performance of its 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 the Company’s discounted cash flow analysis ranged from a decline of approximately 2.0% to a growth
of approximately 8.5%. The Company then discounts 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, the Company further adjusts 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 the Company’s
average borrowing rate for the period. The discount rates used in the Company’s fiscal 2009 year-end impairment
test and 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, the Company estimated that approximately 90% of the carrying value of its
franchise rights acquired had a fair value of at least three times their respective carrying amounts. In the United
States, the region which held approximately 87% of the franchise rights acquired, the aggregate fair value of the
Company’s 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 the Company’s franchise rights
acquired, the Company believes there are currently no reasonably likely changes in assumptions that would cause
an impairment.
The Company expenses all software costs (including website development costs) incurred during the
preliminary project stage and capitalizes all internal and external direct costs of materials and services consumed
in developing software (including website development costs), once the development has reached the application
development stage. Application development stage costs generally include software configuration, coding,
installation to hardware and testing. These costs are amortized over their estimated useful life of 3 years for
website development costs and from 3 to 5 years for all other software costs. All costs incurred for upgrades,
maintenance and enhancements, including the cost of website content, which does not result in additional
functionality, are expensed as incurred.
Revenue Recognition:
WWI earns revenue by conducting meetings, selling products in its meetings and to its franchisees,
collecting commissions from franchisees, collecting royalties related to licensing agreements and selling
advertising space in and copies of its magazine. WWI charges non-refundable registration fees in exchange for
an introductory information session and materials it provides to new members in its meetings business. Revenue
from these registration fees is recognized when the service and products are provided, which is generally at the
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