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Franchise Rights Acquired, Goodwill and Other Intangible Assets | 6 Months Ended
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Jun. 27, 2020
Goodwill And Intangible Assets Disclosure [Abstract] |
Franchise Rights Acquired, Goodwill and Other Intangible Assets |
6. | Franchise Rights Acquired, Goodwill and Other Intangible Assets
Franchise rights acquired are due to acquisitions of the Company’s franchised territories as well as the acquisition of franchise promotion agreements and other factors associated with the acquired franchise territories. For the six months ended June 27, 2020, the change in the carrying value of franchise rights acquired was primarily due to the effect of exchange rate changes. Goodwill primarily relates to the acquisition of the Company by The Kraft Heinz Company (successor to H.J. Heinz Company) in 1978 and the Company’s acquisitions of WW.com, Inc. (formerly known as WeightWatchers.com, Inc.) in 2005, the Company’s franchised territories and the majority interest in Vigilantes do Peso Marketing Ltda. For the six months ended June 27, 2020, the change in the carrying amount of goodwill was due to the impairment charge of the Company’s Brazil reporting unit and the effect of exchange rate changes as follows:
|  | North |  |  | Continental |  |  | United |  |  |  |  |  |  |  |  |
|  | America |  |  | Europe |  |  | Kingdom |  |  | Other |  |  | Total |
Balance as of December 28, 2019 |  | $ | 143,940 |  |  | $ | 7,015 |  |  | $ | 1,213 |  |  | $ | 5,748 |  |  | $ | 157,916 |
Goodwill impairment |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | (3,665 | ) |  |  | (3,665 | )
Effect of exchange rate changes |  |  | (1,817 | ) |  |  | 15 |  |  |  | (69 | ) |  |  | (756 | ) |  |  | (2,627 | )
Balance as of June 27, 2020 |  | $ | 142,123 |  |  | $ | 7,030 |  |  | $ | 1,144 |  |  | $ | 1,327 |  |  | $ | 151,624 |
Franchise Rights Acquired Finite-lived franchise rights acquired are amortized over the remaining contractual period, which is generally less than one year. Indefinite-lived franchise rights acquired are tested on an annual basis for impairment. 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 Studio + Digital business and a relief from royalty methodology for franchise rights related to the Company’s Digital business. The aggregate estimated fair value for these rights is then compared to the carrying value of the unit of account for those franchise rights. The Company has determined the appropriate unit of account for purposes of assessing impairment to be the combination of the rights in both the Studio + Digital business and the Digital business in the country in which the applicable acquisition occurred. The book values of these franchise rights in the United States, Canada, United Kingdom, Australia and New Zealand as of the June 27, 2020 balance sheet date were $671,914, $52,724, $11,114, $6,170, and $4,546, respectively. In its hypothetical start-up approach analysis for fiscal 2020, the Company assumed that the year of maturity was reached after 7 years. Subsequent to the year of maturity, the Company estimated future cash flows for the Studio + Digital business in each country based on assumptions regarding revenue growth and operating income margins. The cash flows associated with the Digital business in each country were based on the expected Digital revenue for such country and the application of a royalty rate based on current market terms. The cash flows for the Studio + Digital and Digital businesses were discounted utilizing rates consistent with those utilized in the annual goodwill 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. The values of goodwill in the United States, Canada and other countries as of the June 27, 2020 balance sheet date were $102,968, $39,155 and $9,501, respectively. For all of the Company’s reporting units tested as of May 3, 2020, the Company estimated future cash flows by utilizing the historical debt-free cash flows (cash flows provided by operations less capital expenditures) 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 weighted-average cost of capital, which included the cost of equity and the cost of debt. Franchise Rights Acquired and Goodwill Annual Impairment Test The Company reviews indefinite-lived intangible assets, including franchise rights acquired with indefinite lives, and goodwill 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 May 3, 2020 and May 5, 2019, each the first day of fiscal May, on its indefinite-lived intangible assets and goodwill. In performing its annual impairment analysis as of May 3, 2020 and May 5, 2019, the Company determined that the carrying amounts of its franchise rights acquired with indefinite lives units of account and goodwill reporting units did not exceed their respective fair values and, therefore, no 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 could cause a change in the results of the impairment assessments 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 performed its annual impairment analysis for franchise rights acquired for all of its units of account as of the balance sheet dated June 27, 2020. Each of the units of account except Canada and New Zealand had an estimated fair value at least 35% higher than the respective unit’s carrying amount. Collectively, these units of account represent 92.3% of the Company’s total franchise rights acquired. Based on the results of the Company’s annual franchise rights acquired impairment test performed for its Canada unit of account, which holds 7.1% of the Company’s franchise rights acquired as of the June 27, 2020 balance sheet date, the estimated fair value of this unit of account exceeded its carrying value by approximately 16.5%. Based on the results of the Company’s annual franchise rights acquired impairment test performed for its New Zealand unit of account, which holds 0.6% of the Company’s franchise rights acquired as of the June 27, 2020 balance sheet date, the estimated fair value of this unit of account exceeded its carrying value by approximately 9.8%. Accordingly, a change in the underlying assumptions for New Zealand may change the results of the impairment assessment and, as such, could result in an impairment of the franchise rights acquired related to New Zealand, for which the net book value is $4,546 as of June 27, 2020. Based on the results of the Company’s May 3, 2020 annual goodwill impairment test performed for all of its reporting units as of the June 27, 2020 balance sheet date, there was significant headroom in the goodwill impairment analysis for those units, with the difference between the carrying value and the fair value exceeding 100%. Brazil Goodwill Impairment With respect to the Company’s Brazil reporting unit, during the first quarter of fiscal 2020, the Company made a strategic decision to shift to an exclusively Digital business in that country. The Company determined that making this decision together with the negative impact of COVID-19, the ongoing challenging economic environment in Brazil and the Company’s reduced expectations regarding the reporting unit’s future operating cash flows required the Company to perform an interim goodwill impairment analysis. In performing this discounted cash flow analysis, the Company determined that the carrying amount of this reporting unit exceeded its fair value and as a result recorded an impairment charge of $3,665, which comprises the remaining balance of goodwill for this reporting unit. As it relates to the goodwill 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 growth strategies under the current market conditions in Brazil. The Company then discounted the estimated future cash flows utilizing a discount rate which was calculated using the weighted-average cost of capital, which included the cost of equity and the cost of debt. Finite-lived Intangible Assets The carrying values of finite-lived intangible assets as of June 27, 2020 and December 28, 2019 were as follows:
|  | June 27, 2020 |  |  | December 28, 2019 |
|  | Gross |  |  |  |  |  |  | Gross |  |  |  |  |
|  | Carrying |  |  | Accumulated |  |  | Carrying |  |  | Accumulated |
|  | Amount |  |  | Amortization |  |  | Amount |  |  | Amortization |
Capitalized software costs |  | $ | 124,804 |  |  | $ | 101,929 |  |  | $ | 119,537 |  |  | $ | 97,588 |
Website development costs |  |  | 86,503 |  |  |  | 59,182 |  |  |  | 77,823 |  |  |  | 50,748 |
Trademarks |  |  | 11,945 |  |  |  | 11,345 |  |  |  | 11,869 |  |  |  | 11,228 |
Other |  |  | 14,008 |  |  |  | 4,897 |  |  |  | 14,003 |  |  |  | 4,637 |
Trademarks and other intangible assets |  | $ | 237,260 |  |  | $ | 177,353 |  |  | $ | 223,232 |  |  | $ | 164,201 |
Franchise rights acquired |  |  | 7,877 |  |  |  | 4,421 |  |  |  | 8,180 |  |  |  | 4,618 |
Total finite-lived intangible assets |  | $ | 245,137 |  |  | $ | 181,774 |  |  | $ | 231,412 |  |  | $ | 168,819 |
Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $7,386 and $14,551 for the three and six months ended June 27, 2020, respectively. Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $7,485 and $15,041 for the three and six months ended June 29, 2019, respectively. Estimated amortization expense of existing finite-lived intangible assets for the next five fiscal years and thereafter is as follows:
Remainder of fiscal 2020 |  | $ | 14,376 |
Fiscal 2021 |  | $ | 22,767 |
Fiscal 2022 |  | $ | 12,701 |
Fiscal 2023 |  | $ | 3,229 |
Fiscal 2024 and thereafter |  | $ | 10,290 |

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- Definition The entire disclosure for goodwill and intangible assets. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -URI http://asc.fasb.org/topic&trid=2144416 + Details
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