2. Significant Accounting Policies

Basis of Presentation

The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s, or the SEC, Regulation S-X. Accordingly, it does not include all of the information required by generally accepted accounting principles in the U.S., or U.S. GAAP, for complete financial statements. The condensed consolidated balance sheet at December 31, 2010 was derived from the audited financial statements at that date and does not include all the disclosures required by U.S. GAAP. The Company’s unaudited condensed consolidated financial statements as of September 30, 2011, and for the three and nine months ended September 30, 2011 and 2010, include Herbalife and all of its direct and indirect subsidiaries. In the opinion of management, the accompanying financial information contains all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s unaudited condensed consolidated financial statements as of September 30, 2011, and for the three and nine months ended September 30, 2011 and 2010. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, or the 2010 10-K. Operating results for the three and nine months ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

On April 28, 2011, the Company’s shareholders approved a two-for-one stock split, or the stock split, of the Company’s common shares. One additional common share was distributed to the Company’s shareholders on or around May 17, 2011, for each common share held on May 10, 2011. All references in the financial statements and notes to number of shares and per share amounts have been retrospectively adjusted for all periods presented to reflect the stock split.

New Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2011-08, Testing Goodwill for Impairment. This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then there is no need to perform the two-step impairment test. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements, as it is intended to simplify the assessment for goodwill impairment.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU will require companies to present the components of net and comprehensive income in either one or two consecutive financial statements and eliminates the option to present other comprehensive income in the statement of changes in shareholders’ equity. This ASU is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the potential impact of this adoption on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU expands existing disclosure requirements for fair value measurements and provides additional information on how to measure fair value. The Company is required to apply this ASU prospectively for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the potential impact of this adoption on its consolidated financial statements.

Change in Accounting Principle

In the second quarter of 2011, the Company changed its method of accounting for excess tax benefits recognized as a result of the exercise of employee stock options, stock appreciation rights, or SARs, and other share-based equity grants, from the tax-law-ordering method to the with-and-without method. Under the tax law ordering method, the deduction for share-based compensation is applied against income tax liabilities before other credits are applied, such as foreign tax credits. The with-and-without method applies the deduction for share-based compensation against taxable income after other credits have been applied against taxable income, to the extent allowable and subject to applicable limitations. The with-and-without method separately determines the impact of the tax benefit from share-based compensation after considering the tax effects related to the Company’s on-going operations. A benefit is recorded when deductions for share-based compensation reduces income taxes payable or increases income taxes refund receivable. The Company believes that the with-and-without method is a preferable method of determining the benefit applicable to share-based compensation because it better reflects the Company’s ongoing operations. This change in accounting method primarily impacts the allocation of income taxes and tax benefits between continuing operations, deferred tax items, and additional paid in capital for financial reporting purposes, but it does not have any impact on the ultimate amount of income tax reported on the Company’s income tax returns and it does not impact the Company’s income taxes payable included within its accompanying consolidated balance sheet. This change in accounting principle does not impact the consolidated financial statements related to fiscal years prior to 2010.

This change in accounting principle is applied to all periods presented and the following tables summarize the impact of this change on the Company’s consolidated financial statements, and as applicable, to the notes to the consolidated financial statements:

Consolidated Balance Sheet

		December 31, 2010
		As Previously
		Reported				As Adjusted
		(in thousands)
Paid-in capital in excess of par value		$	257,375			$	248,693
Retained earnings		$	257,004			$	265,686

Consolidated Statements of Income

		Three Months Ended								Nine Months Ended
		September 30, 2010								September 30, 2010
		As Previously								As Previously
		Reported				As Adjusted				Reported				As Adjusted
		(In thousands, except per share amount)
Income Taxes		$	23,024			$	19,879			$	65,435			$	62,048
Net Income		$	75,739			$	78,884			$	209,543			$	212,930
Basic earnings per share (1)		$	0.64			$	0.67			$	1.76			$	1.79
Diluted earnings per share (1)		$	0.61			$	0.63			$	1.68			$	1.69

Common Share Amounts Used to Compute Basic and Diluted Earnings Per Share

		Three Months Ended								Nine Months Ended
		September 30, 2010								September 30, 2010
		As Previously								As Previously
		Reported (1)				As Adjusted				Reported (1)				As Adjusted
		(In thousands)
Weighted average shares used in basic computations			118,442				118,442				119,286				119,286
Dilutive effect of exercise of equity grants outstanding			5,010				6,731				4,800				6,516
Dilutive effect of warrants			440				440				414				414
Weighted average shares used in diluted computations			123,892				125,613				124,500				126,216

Consolidated Statement of Cash Flows

		Nine Months Ended
		September 30, 2010
		As Previously
		Reported				As Adjusted
		(In thousands)
Net Income		$	209,543			$	212,930
Excess tax benefits from share-based payment arrangements		$	(9,959	)		$	(6,572	)
Income taxes payable		$	(13,568	)		$	(16,955	)
Net cash provided by operating activities		$	267,734			$	271,121
Excess tax benefits from share-based payment arrangements		$	9,959			$	6,572
Net cash used in financing activities		$	(165,082	)		$	(168,469	)

If the Company had not changed from the prior tax law ordering method of accounting for excess tax benefits in the second quarter of fiscal year 2011, income taxes, net income and earnings per share would have been reflected as noted below:

Consolidated Statements of Income

		Three Months Ended				Nine Months Ended
		September 30, 2011				September 30, 2011
		As Computed Under Prior Method
		(In thousands, except per share amount)
Income Taxes		$	44,594			$	120,800
Net Income		$	106,408			$	303,273
Basic earnings per share		$	0.91			$	2.57
Diluted earnings per share		$	0.87			$	2.45

Venezuela

In February 2011, Herbalife Venezuela purchased U.S. dollar denominated bonds with a face value of $20 million U.S. dollars in a bond offering from Petróleos de Venezuela, S.A., a Venezuelan state-owned petroleum company, for 86 million Bolivars and then immediately sold the bonds for $15 million U.S. dollars, resulting in an average effective conversion rate of 5.7 Bolivars per U.S. dollar. The 86 million Bolivars were previously remeasured at the regulated system rate, or SITME rate, of 5.3 Bolivars per U.S. dollar and recorded as cash and cash equivalents of $16.3 million on the Company’s consolidated balance sheet at December 31, 2010. This Bolivar to U.S. dollar conversion resulted in the Company recording a net pre-tax loss of $1.3 million U.S. dollars during the first quarter of 2011 which is included in its condensed consolidated statement of income for the nine months ended September 30, 2011.

As of September 30, 2011, Herbalife Venezuela’s net monetary assets and liabilities denominated in Bolivars was approximately $21.5 million, and included approximately $29.0 million in Bolivar denominated cash and cash equivalents. The majority of these Bolivar denominated assets and liabilities were remeasured at the SITME rate. Although Venezuela is an important market in the Company’s South and Central America region, Herbalife Venezuela’s net sales represented less than 2% of the Company’s consolidated net sales for both the nine months ended September 30, 2011 and 2010, and its total assets represented less than 3% of the Company’s consolidated total assets as of both September 30, 2011 and December 31, 2010.

See the Company’s 2010 10-K for further information on Herbalife Venezuela and Venezuela’s highly inflationary economy.