Nutrisystem 2005 Annual Report Download - page 49

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and $0, respectively, of capitalized direct-mail advertising costs are included in other current assets and $1,027
and $253 of costs have been prepaid for upcoming advertisements and promotions. Media expense was $44,084,
$5,274 and $2,099 in 2005, 2004 and 2003, respectively.
Accounting for Lease Related Expenses
Certain of the Company’s lease contracts contain rent holidays, various escalation clauses, or landlord/
tenant incentives.
The Company records rental costs, including costs related to fixed rent escalation clauses and rent holidays,
on a straight-line basis over the lease term. Landlord/tenant incentives are recorded as leasehold improvement
assets and amortized over the shorter of the economic useful life of the asset or the lease term. Tenant allowances
received are recorded as deferred rent and amortized as reductions to rent expense over the lease term.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
consolidated statement of operations in the period that includes the enactment date.
At December 31, 2002, deferred tax assets were offset by a full valuation allowance. In the second quarter
of 2003, management determined based on an analysis of the cumulative level of pretax profits over the past
three years and projected level of profits that recognition of deferred tax assets was more likely than not. As a
result, the valuation allowance was reduced and a deferred tax asset and a deferred tax liability were recorded on
the consolidated balance sheet and an income tax benefit was recorded in the consolidated statement of
operations (see Note 10).
Fair Value of Financial Instruments
The carrying values of the Company’s financial instruments, including cash, cash equivalents, marketable
securities, trade receivables and accounts payable, approximate the fair values due to the short-term nature of
these instruments. The carrying amount of the note payable approximates the fair value.
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