WeightWatchers 2013 Annual Report Download - page 57

Franchise Rights Acquired, Goodwill and Other Intangible Assets
Finite-lived intangible assets are amortized using the straight-line method over their estimated useful lives
of 3 to 20 years. We review goodwill and other indefinite-lived intangible assets, including franchise rights
acquired, for potential impairment on at least an annual basis or more often if events so require. We performed
fair value impairment testing as of the end of fiscal 2013 and fiscal 2012 on our goodwill and other indefinite-
lived intangible assets.
In performing the impairment analysis for goodwill, the fair value for our reporting units is estimated using
a discounted cash flow approach. This approach involves projecting future cash flows attributable to the
reporting unit and discounting those estimated cash flows using an appropriate discount rate. The estimated fair
value is then compared to the carrying value of the reporting unit. We have determined the appropriate reporting
unit for purposes of assessing annual impairment to be the country for all reporting units aside from
WeightWatchers.com, for which the reporting unit has been aggregated into one unit. The values of goodwill for
the WWI reporting units in the United States, Canada and other countries at December 28, 2013 were $32.7
million, $5.1 million and $3.7 million, respectively, totaling $41.5 million. The value of goodwill for the
WeightWatchers.com reporting unit at December 28, 2013 was $37.8 million.
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 referred to as the hypothetical start-up approach.
The estimated fair value is then compared to the carrying value of the unit of accounting for those franchise
rights. We have determined the appropriate unit of account for purposes of assessing annual impairment to be the
country in which the acquisitions have occurred. The values of these franchise rights in the United States,
Canada, United Kingdom, Australia/New Zealand and other countries at December 28, 2013 were $697.3
million, $110.4 million, $14.4 million, $13.7 million and $1.0 million, respectively, totaling $836.8 million.
When determining fair value, we utilize various assumptions, including projections of future cash flows,
growth rates and discount rates. A change in these underlying assumptions will cause a change in the results of
the tests and, as such, could cause fair value to be less than the 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 the fiscal year ended December 28, 2013, we determined that,
based on the fair values calculated, the carrying amounts of the franchise rights acquired related to our Mexico
and Hong Kong operations exceeded their respective fair values as of the end of fiscal 2013 and recorded
impairment charges of $935 and $231, respectively. We determined that the carrying amounts of our other
remaining assets did not exceed their respective fair values, and therefore, no other impairment existed.
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 2013, the compound annual growth rates used in our discounted cash
flow analysis ranged from a decline of approximately 5% to growth of approximately 12%. In applying the
hypothetical start-up approach in fiscal 2013, we generally assume the year of maturity is reached after 7 years.
Subsequent to the year of maturity we have assumed growth rates ranging from a decline of approximately 2% to
growth of approximately 8%. 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%. We then discount the estimated
future cash flows utilizing a discount rate which 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-
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