Nutrisystem 2010 Annual Report Download - page 50

Included in fixed assets is the capitalized cost of internal-use software and website development incurred during
the application development stage. Capitalized costs are amortized using the straight-line method over the
estimated useful life of the asset, which is generally two to five years. Costs incurred related to planning or
maintenance of internal-use software and website development are charged to expense as incurred. The net book
value of capitalized software was $12,845 and $12,332 at December 31, 2010 and 2009, respectively.
Long-Lived Assets
The Company continually evaluates whether events or circumstances have occurred that would indicate that the
remaining estimated useful lives of long-lived assets may warrant revision or that the remaining balance may not
be recoverable. Long-lived assets are evaluated for indicators of impairment. When factors indicate that long-
lived assets should be evaluated for possible impairment, an estimate of the related undiscounted cash flows over
the remaining life of the long-lived assets is used to measure recoverability. If any impairment is indicated,
measurement of the impairment will be based on the difference between the carrying value and fair value of the
asset, generally determined based on the present value of expected future cash flows associated with the use of
the asset. As of December 31, 2010, management believes that no reductions to the remaining useful lives or
write-downs of long-lived assets are required.
Foreign Currency Translation
The functional currency of the Company’s Canadian subsidiary is the Canadian dollar. Assets and liabilities are
translated into U.S. dollars at exchange rates as of the financial statement date and revenues and expenses are
translated at average exchange rates prevailing during the respective periods. Translation adjustments are
included as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity in
the accompanying consolidated balance sheets. Gains and losses from foreign currency transactions are
recognized as other income (expense) in the accompanying consolidated statements of operations and were $32
of expense in 2010, $407 of income in 2009 and $1,155 of expense in 2008.
Derivative Instruments
Interest rate swap agreements, a type of financial derivative instrument, are utilized by the Company to reduce
interest rate risk on credit facility borrowings. The Company recognizes the interest rate swaps in the
accompanying consolidated balance sheets at fair value. The Company has designated and accounted for its
interest rate swaps as cash flow hedges of variable-rate debt. The effective portion of the gain or loss on the
derivative is reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity
in the accompanying consolidated balance sheets, net of tax, and reclassified into earnings in the periods during
which the hedged transactions affect earnings. To the extent that the change in value of the derivative does not
perfectly offset the change in value of the items being hedged, that ineffective portion is immediately recognized
in earnings.
Revenue Recognition
Revenue from product sales is recognized when the earnings process is complete, which is upon transfer of title
to the product. Recognition of revenue upon shipment meets the revenue recognition criteria in that persuasive
evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and
collection is reasonably assured. The Company sells prepaid program cards to wholesalers and retailers. Revenue
from these cards is recognized after the card is redeemed online at the Company’s website by the customer and
the product is shipped to the customer.
Deferred revenue consists primarily of unredeemed prepaid program cards and unshipped frozen foods.
Customers may return unopened product within 30 days of purchase in order to receive a refund or credit.
Estimated returns are accrued at the time the sale is recognized and actual returns are tracked monthly. The
Company reviews its history of actual versus estimated returns to ensure reserves are appropriate.
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