| Summary of Significant Accounting Policies | 2. Summary
of Significant Accounting Policies
Fiscal
Year:
The
Company’s fiscal year ends on the Saturday closest to
December 31 st and
consists of either 52 or 53-week
Use of
Estimates:
The
preparation of financial statements, in conformity with GAAP,
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the 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. On an ongoing basis, the Company
evaluates its estimates and judgments, including those related to
inventories, the impairment analysis for goodwill and other
indefinite-lived intangible assets, share-based compensation,
income taxes, tax contingencies and litigation. The Company bases
its estimates on historical experience and on various other factors
and assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual amounts could
differ from these estimates.
Translation of Foreign Currencies:
For all
foreign operations, the functional currency is the local currency.
Assets and liabilities of these operations are translated into US
dollars using the exchange rate in effect at the end of each
reporting period. Income statement accounts are translated at the
average rate of exchange prevailing during each reporting period.
Translation adjustments arising from the use of differing exchange
rates from period to period are included in accumulated other
comprehensive income (loss).
Foreign
currency gains and losses arising from the translation of
intercompany receivables and intercompany payables with the
Company’s international subsidiaries are recorded as a
component of other expense (income), net, unless the receivable is
considered long-term in nature, in which case the foreign currency
gains and losses are recorded as a component of accumulated other
comprehensive income (loss).
Cash
Equivalents:
Cash and cash
equivalents are defined as highly liquid investments with original
maturities of three months or less. Cash balances may, at times,
exceed insurable amounts. The Company believes it mitigates this
risk by investing in or through major financial institutions. Cash
includes balances due from third-party credit card
companies.
Inventories:
Inventories,
which consist of finished goods, are stated at the lower of cost or
market on a first-in, first-out basis, net of reserves for
obsolescence and shrinkage.
Property
and Equipment:
Property and
equipment are recorded at cost. For financial reporting purposes,
equipment is depreciated on the straight-line method over the
estimated useful lives of the assets (3 to 10 years).
Leasehold improvements are amortized on the straight-line method
over the shorter of the term of the lease or the useful life of the
related assets. Expenditures for new facilities and improvements
that substantially extend the useful life of an asset are
capitalized. Ordinary repairs and maintenance are expensed as
incurred. When assets are retired or otherwise disposed of, the
cost and related depreciation are removed from the accounts and any
related gains or losses are included in income.
Impairment
of Long Lived Assets:
The Company
reviews long-lived assets, including amortizable intangible assets,
for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully
recoverable.
In fiscal
2015, the Company recorded an impairment charge of $2,028 related
to internal-use computer software that was not expected to provide
substantive service potential.
In fiscal
2015 and fiscal 2014, the Company recorded impairment charges of
$427 and $652, respectively, related to property, plant and
equipment that were expected to be disposed of before the end of
their estimated useful lives.
In fiscal
2013, the Company commenced the shutdown of its China operations
and, as a result, recorded an impairment charge of $1,607 related
to property, plant and equipment ($372) and amortizable intangible
assets ($1,235). The Company also recorded an impairment charge of
$2,653 in fiscal 2013 related to internal-use computer software
that was not expected to provide substantive service
potential.
Goodwill
and Franchise Rights Acquired and Other Intangible
Assets:
Finite-lived
intangible assets are amortized using the straight-line method over
their estimated useful lives of 3 to 20 years or, in the case of
amortizable franchise rights acquired, over the remaining
contractual period, which is generally less than one
year.
The Company
reviews goodwill and other indefinite-lived intangible assets,
including franchise rights acquired with indefinite lives, for
potential impairment on at least an annual basis or more often if
events so require. The Company performed fair value impairment
testing as of the end of fiscal 2015 and fiscal 2014 on its
goodwill and other indefinite-lived intangible assets.
In performing
the impairment analysis for the fiscal year ended January 2,
2016 and for the fiscal year ended January 3, 2015, the
Company determined that the carrying amounts of its franchise
rights acquired with indefinite lives did not exceed their
respective fair values and therefore, no impairment existed. In
performing the impairment analysis for the fiscal year ended
December 28, 2013, the Company determined that, based on the
fair values calculated, the carrying amounts of the
indefinite-lived franchise rights acquired related to its Mexico
and Hong Kong operations exceeded their respective fair values and
recorded impairment charges of $935 and $231, respectively. The
Company determined that the carrying amounts of the remainder of
its franchise rights acquired with indefinite lives did not exceed
their respective fair values as of the end of fiscal 2013, and
therefore, no other impairment existed.
When
determining fair value, the Company utilizes various assumptions,
including projections of future cash flows, growth rates and
discount rates. A change in these underlying assumptions will cause
a change in the results of the tests and, as such, could cause fair
value to be less than the carrying amounts and result in an
impairment of those assets. In the event such a result occurred,
the Company would be required to record a corresponding charge,
which would impact earnings. The Company would also be required to
reduce the carrying amounts of the related assets on its balance
sheet. The Company continues to evaluate these estimates and
assumptions and believes that these assumptions are
appropriate.
The following
is a discussion of the goodwill and franchise rights acquired
impairment analysis.
Goodwill
In performing
the impairment analysis for goodwill, the fair value for the
Company’s reporting units is estimated using a discounted
cash flow approach. This approach involves projecting future cash
flows attributable to the reporting unit and discounting those
estimated cash flows using an appropriate discount rate. The
estimated fair value is then compared to the carrying value of the
reporting unit. The Company has determined the appropriate
reporting unit for purposes of assessing annual impairment to be
the country for all reporting units. To date, the Company has not
recorded an impairment of goodwill.
For all of
the Company’s reporting units except for Brazil (see below),
the Company estimated future cash flows by utilizing the historical
debt-free cash flows attributable to that country and then applied
expected future operating income growth rates for such country. The
Company utilized operating income as the basis for measuring its
potential growth because it believes it is the best indicator of
the performance of its business. The Company then discounted the
estimated future cash flows utilizing a discount rate which was
calculated using the average cost of capital, which included the
cost of equity and the cost of debt. The cost of equity was
determined by combining a risk-free rate of return and a market
risk premium for the Company’s peer group. The risk-free rate
of return was generally determined based on the average rate of
long-term U.S. Treasury securities. The market risk premium was
generally determined by reviewing external market data. The cost of
debt was determined by estimating the Company’s current
borrowing rate.
As it relates
to the impairment analysis for Brazil, the Company estimated future
debt-free cash flows in contemplation of its growth strategies for
that market. In developing these projections, the Company
considered the historical impact of similar growth strategies in
other markets as well as the current market conditions in Brazil.
The Company then discounted the estimated future cash flows
utilizing a discount rate which was calculated using the average
cost of capital, which included the cost of equity and the cost of
debt. The cost of equity was determined by combining a risk-free
rate of return and a market risk premium for the Company’s
peer group. The risk-free rate of return was generally determined
based on the average rate of long-term U.S. Treasury securities.
The market risk premium was generally determined by reviewing
external market data. Additional consideration was given to the
current economic conditions in Brazil and country specific risk as
well as the rate of growth projected in the analysis. The cost of
debt was determined by estimating the Company’s current
borrowing rate.
Franchise
Rights Acquired
In performing
the impairment analysis for indefinite-lived franchise rights
acquired, the fair value for franchise rights acquired is estimated
using a discounted cash flow approach referred to as the
hypothetical start-up approach for franchise rights related to the
Company’s meetings business and a relief from royalty
methodology for franchise rights related to the Company’s
Online business. The aggregate estimated fair value for these
rights is then compared to the carrying value of the unit of
accounting for those franchise rights. The Company has determined
the appropriate unit of account for purposes of assessing annual
impairment to be the combination of the rights in the meetings and
Online businesses in the country in which the acquisitions have
occurred. The values of these franchise rights in the United
States, Canada, United Kingdom, Australia, New Zealand and other
countries at January 2, 2016 were $675,515, $48,435, $11,858,
$6,563, $4,833, and $122, respectively, totaling $747,326 and
the values at January 3, 2015 were $675,515, $57,579, $13,138,
$7,272, $5,449 and $1,930, respectively, totaling
$760,883.
The Company
estimated future cash flows for each unit of accounting by
utilizing a hypothetical start-up approach in which it assumed that
the year of maturity was reached after 7 years. Subsequent to the
year of maturity, the Company assumed debt-free cash flow growth
rates based on its expected future operating income growth rates
for such country. The Company utilized operating income as the
basis for measuring its potential growth because it believes it is
the best indicator of the performance of its business. The Company
then discounted the estimated future cash flows utilizing discount
rates consistent with those used in its goodwill impairment
analysis as discussed above.
Other
Intangible Assets
The Company
expenses all software costs (including website development costs)
incurred during the preliminary project stage and capitalizes all
internal and external direct costs of materials and services
consumed in developing software (including website development
costs) once the development has reached the application development
stage. Application development stage costs generally include
software configuration, coding, installation to hardware and
testing. These costs are amortized over their estimated useful life
of 3 years for website development costs and from 3 to 5 years
for all other software costs. All costs incurred for upgrades,
maintenance and enhancements, including the cost of website
content, which do not result in additional functionality, are
expensed as incurred.
Revenue
Recognition:
WWI earns
revenue by conducting meetings, for which it charges a fee,
predominantly through monthly commitment plans, prepayment plans or
the “pay-as-you-go” arrangement. WWI also earns revenue
from monthly subscriptions for its Online products, selling
products in its meetings, on the Internet and to its franchisees,
collecting commissions from franchisees, collecting royalties
related to licensing agreements, selling magazine subscriptions,
selling advertising space on its website and in copies of its
magazines, ecommerce fees and By Mail product sales.
Monthly
commitment plans, prepaid meeting fees and magazine subscription
revenue is recorded to deferred revenue and amortized into revenue
over the period earned. Online Subscription Revenues, consisting of
the fees associated with subscriptions for the Company’s
Online subscription products, including its Personal Coaching
product, are recognized over the period that products are provided.
One-time sign-up fees are deferred and recognized over the expected
customer relationship period. Online Subscription Revenues that are
paid in advance are deferred and recognized on a straight-line
basis over the subscription period. Revenue from
“pay-as-you-go” meeting fees, product sales, ecommerce
fees, By Mail, commissions and royalties is recognized when
services are rendered, products are shipped to customers and title
and risk of loss pass to the customers, and commissions and
royalties are earned, respectively. Revenue from advertising in
magazines is recognized when advertisements are published. Revenue
from magazine sales is recognized when the magazine is sent to the
customer. In the meetings business, WWI generally charges
non-refundable registration and starter fees in exchange for an
introductory information session and materials it provides to new
members. Revenue from these registration and starter fees is
recognized when the service and products are provided, which is
generally at the same time payment is received from the customer.
Discounts to customers, including free registration offers, are
recorded as a deduction from gross revenue in the period such
revenue was recognized. Revenue from advertising on its website is
recognized when the advertisement is viewed by the user.
The Company
grants refunds in aggregate amounts that historically have not been
material. Because the period of payment of the refund generally
approximates the period revenue was originally recognized, refunds
are recorded as a reduction of revenue when paid.
Advertising Costs:
Advertising
costs consist primarily of television and digital media. All costs
related to advertising are expensed in the period incurred, except
for media production-related costs, which are expensed the first
time the advertising takes place. Total advertising expenses for
the fiscal years ended January 2, 2016, January 3, 2015
and December 28, 2013 were $191,060, $251,954, and $285,298,
respectively.
Income
Taxes:
Deferred
income tax assets and liabilities result primarily from temporary
differences between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in
which differences are expected to reverse. If it is
more-likely-than-not that some portion of a deferred tax asset will
not be realized, a valuation allowance is recognized. The Company
considers historic levels of income, estimates of future taxable
income and feasible tax planning strategies in assessing the need
for a tax valuation allowance.
The Company
recognizes a benefit for uncertain tax positions when a tax
position taken or expected to be taken in a tax return is
more-likely-than-not to be sustained upon examination by taxing
authorities. The amount recognized is measured as the largest
amount of benefit that is greater than 50% likely of being realized
upon ultimate settlement. The Company recognizes accrued interest
and penalties associated with uncertain tax positions as part of
the provision for income taxes on its consolidated statements of
income.
In addition,
assets and liabilities acquired in purchase business combinations
are assigned their fair values and deferred taxes are provided for
lower or higher tax bases.
Derivative
Instruments and Hedging:
The Company
is exposed to certain risks related to its ongoing business
operations, primarily interest rate risk and foreign currency risk.
The primary risk managed by using derivative instruments is
interest rate risk. Interest rate swaps are entered into to hedge a
portion of the cash flow exposure associated with the
Company’s variable-rate borrowings. The Company does not use
any derivative instruments for trading or speculative
purposes.
The Company
recognizes the fair value of all derivative instruments as either
assets or liabilities on the balance sheet. The Company has
designated and accounted for interest rate swaps as cash flow
hedges of its variable-rate borrowings. For derivative instruments
that are designated and qualify as cash flow hedges, the effective
portion of the gain or loss on the derivative is reported as a
component of accumulated other comprehensive income (loss) and
reclassified into earnings in the periods during which the hedged
transactions affect earnings. Gains and losses on the derivative
representing either hedge ineffectiveness or hedge components
excluded from the assessment of effectiveness are recognized in
current earnings.
The fair
value of the Company’s interest rate swaps is reported in
derivative payable and prepaid expenses and other current assets on
its balance sheet. See Note 16 for a further discussion regarding
the fair value of the Company’s interest rate swaps. The net
effect of the interest payable and receivable under the
Company’s interest rate swaps is included in interest expense
on the statement of income.
Deferred
Financing Costs:
Deferred
financing costs consist of fees paid by the Company as part of the
establishment, exchange and/or modification of the Company’s
long-term debt. During the fiscal year ended January 2, 2016,
in connection with the prepayment of debt, the Company wrote-off
deferred financing fees of approximately $647, recorded a gain on
early extinguishment of debt totaling $11,426, and incurred
additional fees of approximately $1,241. During the fiscal year
ended January 3, 2015, the Company wrote-off deferred
financing fees of approximately $1,583 in connection with amending
its Credit Agreement (as defined in Note 7). During the fiscal year
ended December 28, 2013, the Company incurred fees of $44,817
associated with the refinancing of the WWI Credit Facility (as
defined in Note 7). The Company wrote-off fees in connection with
this refinancing which resulted in the Company recording a charge
of $21,685 in early extinguishment of debt. Amortization expense
for the fiscal years ended January 2, 2016, January 3,
2015 and December 28, 2013 was $6,886, $9,305 and $7,672,
respectively.
Accumulated Other Comprehensive Loss:
The
Company’s accumulated other comprehensive loss includes net
income, changes in the fair value of derivative instruments and the
effects of foreign currency translations. At January 2,
2016, January 3, 2015 and December 28, 2013 the
cumulative balance of changes in fair value of derivative
instruments, net of taxes, was $(23,135), $(21,856) and $(4,603),
respectively. At January 2, 2016, January 3, 2015 and
December 28, 2013, the cumulative balance of the effects of
foreign currency translations, net of taxes, was $(14,130) and
$1,906 and $13,120, respectively.
Restructuring Expense:
The Company
records estimated expense for restructuring initiatives when such
costs are deemed probable and estimable, when approved by the
appropriate corporate authority and by accumulating detailed
estimates of costs for such plans. These expenses include the
estimated costs of employee severance and related benefits,
impairment or accelerated depreciation of property, plant and
equipment and capitalized software, and any other qualifying exit
costs. Such costs represent the Company’s best estimate, but
require assumptions about the plans that may change over time,
including attrition rates. Estimates are evaluated periodically to
determine whether an adjustment is required.
Reclassification:
Certain prior
year amounts have been reclassified to conform to the current year
presentation. |
