Lifetime Fitness 2012 Annual Report Download - page 58

LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)
52
We do not present pro forma information for these acquisitions given the immateriality of their results to our
consolidated financial statements.
Impairment of Long-lived Assets — The carrying value of 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, or the inability to recover net book value over the remaining useful
life, 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 level or ancillary
business. The determination of whether impairment has occurred is based on an estimate of undiscounted future cash
flows directly related to that center or ancillary business, compared to the carrying value of these assets. If an
impairment has occurred, the amount of impairment recognized is determined by estimating the fair value of these
assets and recording a loss if the carrying value is greater than the fair value. Based upon our review and analysis, no
impairments on operating assets were deemed to have occurred during 2012, 2011 or 2010.
Derivative Instruments and Hedging Activities — As part of our risk management program, we may periodically use
interest rate swaps to manage known market exposures. Terms of derivative instruments are structured to match the
terms of the risk being managed and are generally held to maturity.
In August 2011, we entered into an interest rate swap contract that effectively fixed the rates paid on a total of
$200.0 million of variable rate borrowings at 1.32% plus the applicable spread (which depends on our EBITDAR
leverage ratio) until June 2016. We pay 1.32% and receive LIBOR on the notional amount of $200.0 million. The
contract has been designated a cash flow hedge against interest rate volatility. In accordance with applicable
accounting guidance, changes in the fair market value of the swap contract are recorded in accumulated other
comprehensive (loss) income, net of tax. As of December 31, 2012, the $3.6 million fair market value loss, net of
tax, of the swap contract was recorded as accumulated other comprehensive loss in the shareholders’ equity section
of our consolidated balance sheets and the $6.1 million gross fair market value of the swap contract was included in
long-term debt.
On an ongoing basis, we assess whether the interest rate swap used in this hedging transaction is “highly effective”
in offsetting changes in the fair value or cash flow of the hedged item by comparing the current terms of the swap
and the debt to assure they continue to coincide and through an evaluation of the continued ability of the
counterparty to the swap to honor its obligations under the swap. If it is determined that the derivative is not highly
effective as a hedge or hedge accounting is discontinued, any change in fair value of the derivative since the last date
at which it was determined to be effective would be recognized in earnings. No amounts related to ineffectiveness
have been recognized in earnings for the years ended December 31, 2012, 2011 or 2010.
Goodwill — The goodwill acquired during the year ended December 31, 2011 is primarily from the purchase of
certain acquired fitness centers as well as other smaller acquisitions. The goodwill acquired during the year ended
December 31, 2012 is primarily from the acquisition of race registration and timing businesses as well as other
smaller acquisitions. We are currently in the process of finalizing the valuation of the assets acquired and liabilities
assumed. The changes in the carrying amount of goodwill are as follows:
Balance at December 31, 2010 $ 13,322
Goodwill acquired 12,228
Balance at December 31, 2011 25,550
Goodwill acquired 11,626
Balance at December 31, 2012 $ 37,176
In accordance with accounting guidance, goodwill is determined to have an indefinite useful life and is not
amortized but instead tested for impairment annually at September 30, or more frequently if necessary. We test
goodwill at the reporting unit level which is one level below the operating segment. For us, this is generally the