WeightWatchers 2011 Annual Report Download - page 58

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 December 31, 2011 were $656.6 million, $70.7 million, $16.6 million, $15.2 million and
$4.9 million, respectively, totaling $764.0 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 2011, the blended growth rates used in our discounted cash flow analysis
ranged from approximately 3% to approximately 20%. For fiscal 2010, the blended growth rates used in our
discounted cash flow analysis ranged from approximately 5% to approximately 26%. We then discount the
estimated future cash flows utilizing a discount rate. The discount rate is calculated using the 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 2011 year-end impairment
test and our fiscal 2010 year-end impairment test averaged approximately 11.3% and 10.5%, respectively.
At the end of fiscal 2011, 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, the region
which held approximately 86% 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.
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.
Capitalized Software Development
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 the
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.
40