WeightWatchers 2012 Annual Report Download - page 57

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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 2012, the blended growth rates used in our discounted cash flow analysis
ranged from a decline of approximately 3% to growth of approximately 50%. For fiscal 2011, the blended growth
rates used in our discounted cash flow analysis ranged from a growth of approximately 3% to approximately
20%. 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 2012 year-end impairment test and our fiscal 2011 year-end impairment test averaged approximately
9.2% and 11.3%, respectively.
At the end of fiscal 2012, we estimated that approximately 89% 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 84% of the franchise rights acquired, the aggregate fair value of our franchise rights
acquired was more than four 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 charge.
Derivative Instruments and Hedging
We enter into interest rate swaps to hedge a 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.
Share-Based Compensation
The fair value of restricted stock units and vested shares of restricted stock is determined using the closing
price of our common stock on the date of grant. The fair value of option awards is estimated on the date of grant
using the Black-Scholes option pricing model, which requires estimates of the expected term of the option, the
expected volatility of the Company’s stock price, the risk-free interest rate and the expected dividend yield. We
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