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This excerpt taken from the AN 10-K filed Feb 17, 2010. Critical Accounting Policies and Estimates We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, which require us 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 revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we believe to be reasonable. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Consolidated Financial Statements. Set forth below are the policies and estimates that we have identified as critical to our business operations and an understanding of our results of operations, based on the high degree of judgment or complexity in their application. These excerpts taken from the AN 10-K filed Feb 28, 2008. Critical
Accounting Policies and Estimates
We prepare our Consolidated Financial Statements in conformity
with accounting principles generally accepted in the United
States, which require us 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 revenue
and expenses during the reporting period. We evaluate our
estimates on an ongoing basis and we base our estimates on
historical experience and various other assumptions we believe
to be reasonable. Actual outcomes could differ materially from
those estimates in a manner that could have a material effect on
our Consolidated Financial Statements. Set forth below are the
policies and estimates that we have identified as critical to
our business operations and an understanding of our results of
operations, based on the high degree of judgment or complexity
in their application.
Goodwill, Other Intangible Assets, and Long-Lived
Assets — Goodwill, other intangible assets, and
long-lived assets are significant components of our Consolidated
Balance Sheets. Our policies regarding the valuation of
intangible assets affect the amount of future amortization and
possible impairment charges we may incur.
Goodwill consists of the cost of acquired businesses in excess
of the fair value of net assets acquired, using the purchase
method of accounting. Acquired intangible assets are separately
recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible
asset can be sold, transferred, licensed, rented, or exchanged,
regardless of our intent to do so. Our principal identifiable
intangible assets are rights under franchise agreements with
vehicle manufacturers. We generally expect our franchise
agreements to survive for the foreseeable future, and, when the
agreements do not have indefinite terms, anticipate routine
renewals of the agreements without substantial cost. We believe
that our franchise agreements will contribute to cash flows for
the foreseeable future and have indefinite lives.
Goodwill and franchise rights assets are tested for impairment
annually at June 30 or more frequently when events or
circumstances indicate that impairment may have occurred. We are
subject to financial statement risk to the extent that goodwill,
franchise rights assets, or other intangible assets become
impaired due to decreases in the fair value of the related
underlying business.
The risk of goodwill and franchise rights impairment losses may
increase to the extent that our market capitalization and
earnings decline. A sustained decrease in our market
capitalization, or a negative long-term performance outlook,
could cause the carrying value of our reporting unit to exceed
its fair value, which may result in an impairment loss.
Impairment losses could have an adverse impact on our ability to
satisfy the financial ratios or other covenants under our debt
agreements and could have a material adverse impact on our
results of operations and financial condition.
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We estimate the depreciable lives of our property, plant, and
equipment, including leasehold improvements, and review them for
impairment when events or circumstances indicate that their
carrying amounts may be impaired. We periodically evaluate the
carrying value of assets held for sale to determine if, based on
market conditions, the values of these assets should be
adjusted. Although we believe our property, plant, and equipment
and assets held for sale are appropriately valued, the
assumptions and estimates used may change and we may be required
to record impairment charges to reduce the value of these assets.
Revenue Recognition/Reserves for Finance and Insurance
Chargebacks — Revenue consists of the sales of
new and used vehicles, commissions from related finance and
insurance products, sales of parts and services, and sales of
other products. We recognize revenue in the period in which
products are sold or services are provided. We recognize vehicle
and finance and insurance revenue when a sales contract has been
executed, the vehicle has been delivered, and payment has been
received or financing has been arranged. Rebates, holdbacks,
floorplan assistance, and certain other dealer credits received
from manufacturers are recorded as a reduction of the cost of
the vehicle and recognized into income upon the sale of the
vehicle or when earned under a specific manufacturer program,
whichever is later.
Revenue on finance and insurance products represents commissions
earned by us for: (i) loans and leases placed with
financial institutions in connection with customer vehicle
purchases financed and (ii) vehicle protection products
sold. We primarily sell these products on a straight commission
basis; however we also participate in future underwriting profit
on certain extended service contracts pursuant to retrospective
commission arrangements, which are recognized as earned.
We may be charged back for unearned financing, insurance, or
vehicle protection product commissions in the event of early
termination of the contracts by customers
(“chargebacks”). Revenues from these fees are recorded
at the time of the sale of the vehicles net of an estimated
liability for chargebacks. Our estimate of chargebacks is based
primarily on our historical chargeback experience, and is
influenced by increases or decreases in early termination rates
resulting from cancellation of vehicle protection products,
defaults, refinancings and payoffs before maturity, and other
factors.
Income Taxes — Accounting for our income taxes
requires significant judgment in the evaluation of our uncertain
tax positions and in the calculation of our provision for income
taxes. Effective January 1, 2007, we adopted Financial
Accounting Standards Board (“FASB”) Financial
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109
(“FIN 48”). FIN 48 contains a two-step
approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate available evidence to determine if
it appears more likely than not that an uncertain tax position
will be sustained on an audit by a taxing authority, based
solely on the technical merits of the tax position. The second
step is to measure the tax benefit as the largest amount that is
more than 50% likely of being realized upon settling the
uncertain tax position.
Although we believe we have adequately reserved for our
uncertain tax positions, the ultimate outcome of these tax
matters may differ from our expectations. We adjust our reserves
in light of changing facts and circumstances, such as the
completion of a tax audit, expiration of a statute of
limitations, the refinement of an estimate, and interest
accruals associated with uncertain tax positions until they are
resolved. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences
will impact the provision for income taxes in the period in
which such determination is made.
Our future effective tax rates could be affected by changes in
our deferred tax assets or liabilities, the valuation of our
uncertain tax positions, or by changes in tax laws, regulations,
accounting principles, or interpretations thereof.
Other — Additionally, significant estimates
have been made by us in the accompanying Consolidated Financial
Statements including allowances for doubtful accounts, accruals
related to self-insurance programs, certain legal proceedings,
estimated losses from disposals of discontinued operations, and
certain assumptions related to determining stock option
compensation.
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Critical Accounting Policies and Estimates We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, which require us 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 revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we believe to be reasonable. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Consolidated Financial Statements. Set forth below are the policies and estimates that we have identified as critical to our business operations and an understanding of our results of operations, based on the high degree of judgment or complexity in their application. Goodwill, Other Intangible Assets, and Long-Lived Assets — Goodwill, other intangible assets, and long-lived assets are significant components of our Consolidated Balance Sheets. Our policies regarding the valuation of intangible assets affect the amount of future amortization and possible impairment charges we may incur. Goodwill consists of the cost of acquired businesses in excess of the fair value of net assets acquired, using the purchase method of accounting. Acquired intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of our intent to do so. Our principal identifiable intangible assets are rights under franchise agreements with vehicle manufacturers. We generally expect our franchise agreements to survive for the foreseeable future, and, when the agreements do not have indefinite terms, anticipate routine renewals of the agreements without substantial cost. We believe that our franchise agreements will contribute to cash flows for the foreseeable future and have indefinite lives. Goodwill and franchise rights assets are tested for impairment annually at June 30 or more frequently when events or circumstances indicate that impairment may have occurred. We are subject to financial statement risk to the extent that goodwill, franchise rights assets, or other intangible assets become impaired due to decreases in the fair value of the related underlying business. The risk of goodwill and franchise rights impairment losses may increase to the extent that our market capitalization and earnings decline. A sustained decrease in our market capitalization, or a negative long-term performance outlook, could cause the carrying value of our reporting unit to exceed its fair value, which may result in an impairment loss. Impairment losses could have an adverse impact on our ability to satisfy the financial ratios or other covenants under our debt agreements and could have a material adverse impact on our results of operations and financial condition.
Table of ContentsWe estimate the depreciable lives of our property, plant, and equipment, including leasehold improvements, and review them for impairment when events or circumstances indicate that their carrying amounts may be impaired. We periodically evaluate the carrying value of assets held for sale to determine if, based on market conditions, the values of these assets should be adjusted. Although we believe our property, plant, and equipment and assets held for sale are appropriately valued, the assumptions and estimates used may change and we may be required to record impairment charges to reduce the value of these assets. Revenue Recognition/Reserves for Finance and Insurance Chargebacks — Revenue consists of the sales of new and used vehicles, commissions from related finance and insurance products, sales of parts and services, and sales of other products. We recognize revenue in the period in which products are sold or services are provided. We recognize vehicle and finance and insurance revenue when a sales contract has been executed, the vehicle has been delivered, and payment has been received or financing has been arranged. Rebates, holdbacks, floorplan assistance, and certain other dealer credits received from manufacturers are recorded as a reduction of the cost of the vehicle and recognized into income upon the sale of the vehicle or when earned under a specific manufacturer program, whichever is later. Revenue on finance and insurance products represents commissions earned by us for: (i) loans and leases placed with financial institutions in connection with customer vehicle purchases financed and (ii) vehicle protection products sold. We primarily sell these products on a straight commission basis; however we also participate in future underwriting profit on certain extended service contracts pursuant to retrospective commission arrangements, which are recognized as earned. We may be charged back for unearned financing, insurance, or vehicle protection product commissions in the event of early termination of the contracts by customers (“chargebacks”). Revenues from these fees are recorded at the time of the sale of the vehicles net of an estimated liability for chargebacks. Our estimate of chargebacks is based primarily on our historical chargeback experience, and is influenced by increases or decreases in early termination rates resulting from cancellation of vehicle protection products, defaults, refinancings and payoffs before maturity, and other factors. Income Taxes — Accounting for our income taxes requires significant judgment in the evaluation of our uncertain tax positions and in the calculation of our provision for income taxes. Effective January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate available evidence to determine if it appears more likely than not that an uncertain tax position will be sustained on an audit by a taxing authority, based solely on the technical merits of the tax position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settling the uncertain tax position. Although we believe we have adequately reserved for our uncertain tax positions, the ultimate outcome of these tax matters may differ from our expectations. We adjust our reserves in light of changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and interest accruals associated with uncertain tax positions until they are resolved. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. Our future effective tax rates could be affected by changes in our deferred tax assets or liabilities, the valuation of our uncertain tax positions, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. Other — Additionally, significant estimates have been made by us in the accompanying Consolidated Financial Statements including allowances for doubtful accounts, accruals related to self-insurance programs, certain legal proceedings, estimated losses from disposals of discontinued operations, and certain assumptions related to determining stock option compensation.
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