Lifetime Fitness 2013 Annual Report Download - page 38

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advertising costs to support and grow center membership levels, in-center businesses, new center openings
and our ancillary businesses.
• General and administrative expenses (4.9%, 5.0% and 5.4% of total revenue for the years ended
December 31, 2013, 2012 and 2011, respectively) include costs relating to our centralized support
functions, such as accounting, information systems, procurement, real estate and development and member
relations.
• Other operating expenses (5.3%, 4.6% and 3.5% of total revenue for the years ended December 31, 2013,
2012 and 2011, respectively) include the costs associated with our health and our events and media
businesses and other corporate expenses, as well as gains or losses on our disposal of assets.
• Depreciation and amortization (9.9%, 10.2% and 9.8% of total revenue for the years ended December 31,
2013, 2012 and 2011, respectively) are computed primarily using the straight-line method over estimated
useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life of the improvement.
Our total operating expenses may vary from period to period depending on the number of new centers opened
during that period, the number of centers engaged in presale activities and the performance of our in-center and
ancillary businesses.
Our primary capital expenditures relate to the construction of new centers and updating and maintaining our existing
centers. The land acquisition, construction and equipment costs for a current model center can vary considerably
based on location, variability in land cost, the cost of construction labor and the size or amenities of the center,
including the addition of tennis facilities, an expanded gymnasium or other facilities. We perform maintenance and
make improvements on our centers and equipment throughout each year. We conduct a more thorough remodeling
project at each center approximately every four to six years.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., or
GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and
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, probability of meeting certain performance targets,
tax provisions and deferred personal training revenue. We also use estimates for calculating the amortization period
for deferred enrollment fee revenue and associated direct costs, which are based on the historical estimated average
membership life. 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 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 a quarterly 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. During the years ended December 31, 2011, 2012 and
2013, our annual attrition rate fluctuated between 31.3% and 35.8%, resulting in the estimated average membership
life remaining at 33 months during those periods. If the estimated average membership life had been 36 months or
30 months for the entire year ended December 31, 2013, 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 $26.2 million, $20.7 million and $14.9
million for the years ended December 31, 2013, 2012 and 2011, respectively. Monthly membership dues paid in