Lifetime Fitness 2011 Annual Report Download - page 38

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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 14 days. Enrollment fees and related
direct expenses, primarily sales commissions, are deferred and recognized on a straight-line basis over an estimated
average membership life of 33 months, which is based on historical membership experience. We review the
estimated average membership life 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 estimated average membership life. Our attrition rate in 2009 improved slightly from a high
of 42.7% at the end of first quarter to 40.6% at year-end, and our estimated average membership life was 30 months.
During 2010, our annual attrition rate decreased from 40.6% to 36.3%. During the fourth quarter of 2010, we
changed our estimated average membership life from 30 months to 33 months. During 2011, our annual attrition rate
decreased from 36.3% to 35.0% and our estimated average membership life remained 33 months. If the estimated
average membership life had been 36 months or 30 months for the entire year ended December 31, 2011, the impact
of this change in accounting estimate on our income from continuing operations and net income would have been
less than $0.1 million, and the change in accounting estimate would have had no impact on our basic and diluted
earnings per common share. 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 $14.9
million, $14.9 million and $8.4 million for the years ended December 31, 2011, 2010 and 2009 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, spa, café 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. Restaurant revenue is recognized at the
point of sale to the customer.
Share-based compensation. We maintain share-based incentive plans, which include nonvested share awards, stock
options and an employee stock purchase plan. See Note 5, Share-Based Compensation to the Notes to Consolidated
Financial Statements for a complete discussion of our share-based compensation plans.
We determine the fair value of our nonvested share awards at the date of grant using the closing market price of our
stock. Performance-based restricted share awards require management to make assumptions regarding the likelihood
of achieving performance goals.
In June 2009 and August 2010, the Compensation Committee approved the grant of 996,000 and 20,000 shares,
respectively, of long-term performance-based restricted stock to serve as an incentive to our senior management
team to achieve certain diluted earnings per share (“EPS”) targets in 2011 and 2012. As of December 31, 2011,
907,000 of these shares were still outstanding. A specified EPS target was achieved for fiscal 2011 and 50% of the
restricted shares vested. Since the grant was not fully vested after fiscal 2011, 50% of the shares will vest if a
specified EPS target is achieved for fiscal 2012. In the event that we do not achieve the specified EPS target for
fiscal 2012, the remaining restricted stock will be forfeited. The probability of reaching the targets is evaluated each
reporting period. As of December 31, 2011 we determined that the second 50% vesting was probable. We anticipate
recognizing the remaining portion of performance share-based compensation expense of approximately $2.7 million
(pretax) ratably in 2012. If we later determine that it is not probable that the minimum diluted EPS performance
threshold for 2012 will be met, no further compensation cost will be recognized and any recognized compensation
cost relating to the shares that have not vested will be reversed.