Supercuts 2002 Annual Report Download - page 156

Goodwill is tested for impairment annually or at the time of a triggering event in accordance with the provisions of Statement of Financial
Accounting Standards (FAS) No. 142, "Goodwill and Other Intangible Assets." Fair values are estimated based on the Company's best estimate
of the expected present value of future cash flows and compared with the corresponding carrying value of the reporting unit, including
goodwill. The Company generally considers its various primary brands to be reporting units when it tests for goodwill impairment because that
is where the Company believes goodwill naturally resides. On July 1, 2001, goodwill was tested for impairment in this manner and the
estimated fair value of each reporting unit exceeded its carrying amount, indicating no impairment of goodwill. The Company performs its
annual goodwill impairment testing during its fiscal third quarter.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying value of such assets may
not be fully recoverable. An impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use
of the assets compared to its carrying value. If an impairment is recognized, the carrying value of the impaired asset is reduced to its fair value,
based on discounted estimated future cash flows.
Franchise Revenues and Expenses:
Franchise revenues include royalties, initial franchise fees from franchisees and sales of product to franchisees. Royalties are recognized as
revenue in the month in which franchisee services are rendered or products are sold by franchisees. The Company recognizes revenue from
initial franchise fees at the time franchisee salons are opened. Product sales by the Company to franchisees are recorded at the time product is
shipped to franchise locations. Franchise expenses included in franchise direct costs in the Consolidated Statement of Operations include all
direct expenses, such as the cost of product sold to franchisees. All other indirect expenses associated with franchise operations are included in
corporate and franchise support costs in the Consolidated Statement of Operations.
Advertising:
Advertising costs are expensed as incurred. Advertising costs expensed were $31.3 million, $29.5 million and $24.9 million in fiscal 2002,
2001 and 2000, respectively.
Advertising Funds:
Franchisees and certain company-owned salons are required to contribute a percentage of sales to various advertising funds. The Company
administers the advertising funds at the directive of or subject to input from the franchise community. Accordingly, amounts collected and
spent by the advertising funds are not reflected as revenues and expenditures of the Company. Assets of the advertising funds administered by
the Company, along with an offsetting obligation to spend such assets, are recorded in the Consolidated Balance Sheet.
Income Taxes:
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the
financial statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the
financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are
expected to reverse. Income tax expense is the current tax payable for the period and the change during the period in deferred tax assets and
liabilities.
Net Income Per Share:
Basic earnings per share (EPS) is calculated as net income divided by weighted average common shares outstanding. The Company's dilutive
securities include shares issuable under the Company's stock option plan and shares issuable under contingent stock agreements. Diluted EPS is
calculated as net income divided by weighted average common shares outstanding, increased to include assumed exercise of dilutive securities.
Stock options with exercise prices greater than the average market value of the Company's common stock are excluded from the computation
of diluted EPS.
Reclassifications:
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on net
income or shareholders' equity as previously presented.
Comprehensive Income:
Components of comprehensive income for the Company include net income, the transition adjustment for the adoption of FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted, changes in fair market value of financial
instruments designated as hedges of interest rate exposure and foreign currency translation charged or credited to the cumulative translation
account within shareholders' equity. These amounts are presented in the Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income.
Recent Accounting Pronouncements:
Effective July 1, 2001 and January 1, 2002, the Company adopted the provisions of FAS No. 141, "Business Combinations," and FAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," respectively. The initial adoption of these Statements did not have a
material impact on the Consolidated Statement of Operations.
The Financial Accounting Standards Board ("FASB") recently issued FAS No. 143, "Accounting for Asset Retirement Obligations," which
addresses financial accounting and reporting for obligations associated with the
31