Organization and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Organization and Summary of Significant Accounting Policies

Organization and Summary of Significant Accounting Policies

Note 1                    Organization and Summary of Significant Accounting Policies

Organization and Business

RDA Holding Co. is principally a holding company.  We conduct our operations primarily through our wholly-owned subsidiary, The Reader’s Digest Association, Inc. (“RDA”), and subsidiaries of RDA.  RDA Holding Co.’s primary asset is its sole ownership of all issued and outstanding shares of common stock of RDA.  References in the Notes to Consolidated Financial Statements to “we,” “us,” “our,” “HoldCo” and the “Company” are to RDA Holding Co., and subsidiaries.

RDA is a global multi-brand media and direct marketing company that educates, entertains and connects audiences around the world.  We are dedicated to providing our customers with the inspiration, ideas and tools that simplify and enrich lives.  RDA markets books, magazines, recorded music collections, home video products and other products.  We sell our products worldwide through direct marketing and other sales channels.

On August 12, 2011, the Company entered into credit agreements, which provided the Company with a $45.0 secured term loan and a $10.0 unsecured term loan (as defined below). See Note 11, Debt, for further information.

On April 18, 2011, holders of a majority of the Company’s outstanding common stock removed seven of the eight members of our Board of Directors (“Board”) and filled all vacancies with new members.  This event caused an event of default on the Senior Credit Facility (as defined and further discussed in Note 11, Debt), and accelerated the vesting of stock option and restricted stock unit (“RSU” or “RSUs”) awards.  See Note 13, Equity-Based Compensation, for further information.

On February 28, 2011, the Company announced the final results of its share repurchase tender offer, which expired at 11:59 p.m., EST, on February 25, 2011.  The Company purchased 1,494,134 shares of common stock at a price of $29.00 per common share for a total cost of $43.3.  The shares of common stock accepted for purchase pursuant to the tender offer represented approximately 5.4% of the Company’s then outstanding shares of common stock.  The Company funded the repurchase of the shares using available cash.

Basis of Presentation

Our unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information.  These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated December 31, 2010 financial statements and accompanying notes.

We typically generate our strongest revenue in the fourth calendar quarter due to consumer purchases during the holiday season.  Summer and fall are the most active promotional periods in our North America segment for our magazine and books and home entertainment businesses, in part due to the significant percentage of our revenue that results from holiday gifts.  These periods of increased promotions have a significant impact on our profitability during such periods.  Our businesses outside of North America are also seasonal, with fluctuations in profits as a result of the timing of customer acquisition mailings (generally made in the first and third quarters, depressing profits in those quarters as a result), and revenue tends to be strongest in the fourth quarter due to holiday consumer purchases.

As discussed in Note 2, Reorganization and Emergence from Chapter 11, the Company emerged from chapter 11 bankruptcy protection on February 19, 2010 (“Effective Date”), and adopted fresh start accounting in accordance with Accounting Standards Codification (“ASC”), Topic 852, Reorganizations (“ASC 852”).  The adoption of fresh start accounting resulted in our becoming a new entity for financial reporting purposes.  Accordingly, our consolidated financial statements on February 19, 2010 and subsequent periods are not comparable, in various material respects, to our consolidated financial statements prior to that date.

Driven by changes in the alignment of our management team and the manner in which our chief operating decision maker reviews the business, we modified our reporting structure during the three months ended September 30, 2011.  This change realigned our United States and Canada operations to gain further efficiencies and formed a North America operating segment.  In addition, our Allrecipes business was moved out of the previously reported United States segment, reporting directly to our chief operating decision maker.  We recast our reportable segment results for previous periods to conform with the changes to our reportable segments.

Our businesses are now structured into the following six reportable segments: North America, Europe, Asia Pacific & Latin America (“APLA”), Lifestyle & Entertainment Direct (“LED”), Allrecipes and Other (Weekly Reader Publishing Group) segments.  See Note 17, Segments, for further information.

The Company, when used in reference to the period including and subsequent to February 20, 2010 (“Post Emergence”), refers to the “Successor Company”, and when used in reference to the period prior to February 20, 2010 (“Pre Emergence”), refers to the “Predecessor Company”.

During the three months ended June 30, 2011, we issued 2,063,533 shares of Series B (non-voting) common stock.  This was an exchange of the same number of shares from Series A (voting) common stock.  There was no additional activity on Series B (non-voting) common stock during the three months ended September 30, 2011.

Principles of Consolidation

The consolidated financial statements include the consolidated accounts of RDA Holding Co., and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

These statements, in the opinion of management, have been prepared following the requirements of U.S. GAAP for interim reporting, applying certain assumptions and estimates, including all normal, recurring adjustments considered necessary to present such information fairly.  Operating results for any interim period are not necessarily indicative of the results for an entire year due to, among other things, the seasonality of our business.  In preparing the consolidated financial statements in conformity with U.S. GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of the financial statements and during the reporting period.  Actual results could differ from these estimates.

As discussed in Note 3, Fresh Start Accounting, in our audited consolidated December 31, 2010 financial statements, the basis to determine enterprise value and the values of various tangible and intangible assets were determined using a number of factors, including the use of certain valuation methodologies and certain operational assumptions and estimates.  Due to the many variables inherent in the estimation of fair value, differences in assumptions and estimates may have a material effect on the result of our future goodwill and intangible asset impairment tests.

During the three months ended September 30, 2011, we finalized our second quarter interim impairment test and recorded an impairment charge of $8.2, related to goodwill, other intangible assets and property and equipment.  This was in addition to the estimated impairment charge of $256.7 recorded in the three months ended June 30, 2011, as part of our second quarter interim impairment test, for goodwill, other intangible assets and property and equipment. In addition, during the three months ended September 30, 2011, we determined certain indicators of impairment existed in the Canada reporting unit and recorded an impairment charge of $3.0 against tradenames.  See Note 3, Impairment of Assets, for further information.

Significant Accounting Policies

During the three months ended June 30, 2011, management made a decision to allow employees, at his or her option upon settlement of the RSUs issued in connection with the RDA Holding Co. 2010 Equity Incentive Plan (“2010 Plan”) to elect to withhold an amount in excess of the minimum statutory withholding requirement.  As a result of this decision, existing and any future RSU awards granted to employees under the 2010 Plan are accounted for as liability classified awards and will be reported at fair value through the settlement date, in accordance with U.S. GAAP.  See Note 13, Equity-Based Compensation, for further information.  Refer to our audited consolidated December 31, 2010 financial statements and accompanying notes for further information regarding our significant accounting policies.

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation.  Such amounts include the Company’s reclassification of software to be sold or leased.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), which represents an update to ASC 350, Intangibles—Goodwill and Other.  ASU 2011-08 simplifies how entities test goodwill for impairment.  ASU 2011-08 permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether to perform a two-step goodwill impairment test.  ASU 2011-08 is effective for the Company in the first quarter of its fiscal year ending December 31, 2012, and early adoption is permitted.  ASU 2011-08 is not expected to have a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which represents an update to ASC 220, Comprehensive Income.  ASU 2011-05 provides new disclosure guidance for comprehensive income, requiring presentation of each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income.  An entity will have the option to present these items in one continuous statement or two separate but consecutive statements.  An entity will no longer be permitted to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  This update is effective for fiscal years beginning after December 15, 2011 and for interim periods within those years.  The Company plans to adopt this guidance effective January 1, 2012, and it is not expected to have a material impact on our consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”), which represents an update to ASC 820, Fair Value Measurements and Disclosures (“ASC 820”).  ASU 2010-06 provides new disclosure guidance for Level 3 fair value measurement activity, requiring separate presentation of information about purchases, sales, issuances and settlements.  This update is effective for fiscal years beginning after December 15, 2010 and for interim periods within those years.  The Company adopted this guidance effective January 1, 2011, and it did not have a material impact on our consolidated financial statements.

In September 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605)-Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”), which represents an update to ASC 605, Revenue Recognition.  ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on the following: (i) vendor-specific objective evidence; (ii) third-party evidence; or (iii) the estimated selling price.  This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  This update is effective prospectively for revenue arrangements entered into or materially modified for fiscal years beginning on or after June 15, 2010.  The Company adopted this guidance effective January 1, 2011, and it did not have a material impact on our consolidated financial statements.