WeightWatchers 2010 Annual Report Download - page 54

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f
or 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 Zealan
d
and other countries at January 1, 2011 were
$
656.6 million,
$
72.4 million,
$
16.6 million,
$
14.8 million and
$
5.5
million, respectively, totaling
$
765.9 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
o
perating income as the basis for measuring our potential growth because we believe it is the best indicator of the
p
erformance of our business. For fiscal 2010, the blended growth rates used in our discounted cash flow analysis
r
anged from approximately
5
% to a growth rate of approximately 26%. For fiscal 2009, the blended growth rates
used in our discounted cash flow analysis ranged from zero to a growth rate of approximately 11%. We the
n
discount the estimated future cash flows utilizing a discount rate. The discount rate is calculated using th
e
average cost of capital, which includes the cost of equity and the cost of debt. The cost of equity is determined b
y
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 utilize
d
discount rate. The cost of debt is our average borrowing rate for the period. The discount rates used in our fisca
l
2010 year-end impairment test and our fiscal 2009 impairment test averaged approximately 10.
5
% and 11.
5
%
,
r
espectively.
A
t the end of fiscal 2010, we estimated that approximately 90% of the carrying value of our franchise right
s
acquired had a fair value of at least three times their respective carrying amounts. In the United States, the regio
n
which held approximately 86% of the franchise rights acquired, the aggregate fair value of our franchise right
s
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 n
o
r
easonably likely changes in assumptions that would cause an impairment.
Derivative Instruments and Hedgin
g
We enter into interest rate swaps to hedge a substantial portion of our variable rate debt. We record al
l
derivative financial instruments on the consolidated balance sheet at fair value as either assets or liabilities. Fai
r
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.
Income Taxe
s
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
r
ecognized. 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
.
Capitalized So
f
tware Developmen
t
We capitalize certain software costs incurred in connection with developing or obtaining software for
internal use. These costs are amortized over a period of three to five years, the estimated useful life of th
e
software. We periodically evaluate for impairment capitalized software development costs by considering,
among other factors, whether the software is still expected to provide substantive service potential, and whether a
significant change is being made or will be made to the software.
S
hare-Based Com
p
ensatio
n
On January 1, 2006, we adopted accounting guidance on share-based compensation and began recognizin
g
the cost of all share-based awards based on their estimated grant-date fair value over the related service period of
38