Lifetime Fitness 2008 Annual Report Download - page 35

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disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Ultimate results could differ from those estimates. In recording
transactions and balances resulting from business operations, we use estimates based on the best information
available. We use estimates for such items as depreciable lives, volatility factors, expected lives and rate of return in
determining fair value of option grants, tax provisions and provisions for uncollectible receivables. We also use
estimates for calculating the amortization period for deferred enrollment fee revenue and associated direct costs,
which are based on the historical average expected life of center memberships. We revise the recorded estimates
when better information is available, facts change or we can determine actual amounts. These revisions can affect
operating results. We have identified below the following accounting policies that we consider to be critical.
Revenue recognition. We receive a one-time enrollment fee at the time a member joins and monthly membership
dues for usage from our members. The enrollment fees are non-refundable after 30 days. Enrollment fees and related
direct expenses, primarily sales commissions, are deferred and recognized on a straight-line basis over an estimated
membership period of 30 months, which is based on historical membership experience. We review the estimated
membership period on an annual basis, or more frequently if circumstances change. Changes in member behavior,
competition, economic conditions and our performance may cause attrition levels to change, which could impact the
average estimated membership period. During 2008, there was a substantial shift in our attrition activity, primarily
as a result of macroeconomic pressures and a challenging consumer environment. During the second quarter of
2008, we changed our average membership life from 36 months to 33 months. The pressure continued throughout
the second half of 2008; therefore, we reduced the average membership life to 30 months at the beginning of the
fourth quarter. If the estimated membership period had been 30 months for the entire year ended December 31,
2008, the impact would have been an increase in net income of less than $0.1 million. If the direct expenses related
to the enrollment fees exceed the enrollment fees for any center, the amount of direct expenses in excess of the
enrollment fees are expensed in the current period instead of deferred over the average membership life. The amount
of direct expenses in excess of enrollment fees totaled $6.0 million and $1.4 million for the years ended December
31, 2008 and 2007 respectively. Monthly membership dues paid in advance of a center opening are deferred until
the center opens. We only offer members month-to-month memberships and recognize as revenue the monthly
membership dues in the month to which they pertain.
We provide services at each of our centers, including personal training, LifeSpa, LifeCafe and other member
services. The revenue associated with these services is recognized at the time the service is performed. Personal
training revenue received in advance of training sessions and the related commissions are deferred and recognized
when services are performed. Other revenue, which includes revenue generated primarily from our media, athletic
events and restaurant, is recognized when realized and earned. Media advertising revenue is recognized over the
duration of the advertising placement. For athletic events, revenue is generated primarily through sponsorship sales
and registration fees. Athletic event revenue is recognized upon the completion of the event. In limited instances in
our media and athletic events businesses, we recognize revenue on barter transactions. We recognize barter revenue
equal to the lesser of the value of the advertising or promotion given up or the value of the asset received. Restaurant
revenue is recognized at the point of sale to the customer.
Pre-opening operations. We generally operate a preview center up to nine months prior to the planned opening of a
center during which time memberships are sold as construction of the center is completed. The revenue and direct
membership acquisition costs, primarily sales commissions, incurred during the period prior to a center opening are
deferred until the center opens and are then recognized on a straight-line basis over the estimated membership
period, beginning when the center opens; however, all other costs, including advertising, office and rent expenses
incurred during this period, are expensed as incurred.
Impairment of long-lived assets. The carrying value of our long-lived assets is reviewed annually and whenever
events or changes in circumstances indicate that such carrying values may not be recoverable. We consider a history
of consistent and significant operating losses to be our primary indicator of potential impairment. Assets are grouped
and evaluated for impairment at the lowest level for which there are identifiable cash flows, which is generally at an
individual center or corporate business level. The determination of whether an impairment has occurred is based on
an estimate of undiscounted future cash flows directly related to that center or corporate business, compared to the
carrying value of the assets. If an impairment has occurred, the amount of impairment recognized is determined by
estimating the fair value of the assets and recording a loss if the carrying value is greater than the fair value.