Advance Auto Parts 2004 Annual Report Download - page 20

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Vendor฀Incentives
฀ We฀ receive฀ incentives฀ in฀ the฀ form฀ of฀ reductions฀ to฀
amounts฀ owed฀ and/or฀ payments฀ from฀ vendors฀ related฀ to฀
cooperative฀ advertising฀ allowances,฀ volume฀ rebates฀ and฀
other฀ promotional฀ consideration.฀ We฀ account฀ for฀ vendor฀
incentives฀in฀accordance฀with฀Emerging฀Issues฀Task฀Force,฀฀
or฀EITF,฀No.฀02-16,฀“Accounting฀by฀a฀Customer฀(Including฀
a฀ Reseller)฀ for฀ Certain฀ Consideration฀ Received฀ from฀ a฀
Vendor.”฀Many฀of฀the฀incentives฀are฀provided฀under฀long-
term฀ agreements฀ (terms฀ in฀ excess฀ of฀ one฀ year),฀ while฀฀
others฀are฀negotiated฀on฀an฀annual฀basis.฀Certain฀vendors฀
require฀us฀to฀use฀cooperative฀advertising฀allowances฀exclu-
sively฀ for฀ advertising.฀ We฀ define฀ these฀ allowances฀ as฀
restricted฀ cooperative฀ advertising฀ allowances฀ and฀ recog-
nize฀them฀as฀a฀reduction฀ to฀ selling,฀general฀ and฀adminis-
trative฀ expenses฀ as฀ incremental฀ advertising฀ expenditures฀
are฀incurred.฀The฀remaining฀cooperative฀advertising฀allow-
ances฀not฀restricted฀by฀our฀vendors฀and฀volume฀rebates฀are฀
earned฀ based฀ on฀ inventory฀ purchases฀ and฀ recorded฀ as฀ a฀
reduction฀to฀inventory฀and฀recognized฀through฀cost฀of฀sales฀
as฀the฀inventory฀is฀sold.
฀ We฀ recognize฀ certain฀ other฀ promotional฀ incentives฀
earned฀under฀long-term฀supply฀agreements฀as฀a฀reduction฀
to฀cost฀of฀sales.฀These฀incentives฀are฀recognized฀based฀on฀
the฀cumulative฀purchases฀as฀a฀percentage฀of฀total฀estimated฀
purchases฀over฀the฀life฀of฀the฀ agreement.฀The฀estimate฀of฀
total฀purchases฀are฀highly฀sensitive฀to฀market฀demand฀for฀
that฀product฀and฀could฀positively฀or฀negatively฀impact฀our฀
cost฀ of฀ sales฀ if฀ actual฀ purchases฀ or฀ results฀ from฀ any฀ year฀
differ฀from฀our฀estimates;฀however,฀incentives฀earned฀over฀
the฀ life฀ of฀ the฀ agreement฀ would฀ be฀ the฀ same.฀ Incentives฀
associated฀with฀short-term฀agreements฀are฀recognized฀as฀a฀
reduction฀ to฀ cost฀ of฀ sales฀ over฀ the฀ course฀ of฀ the฀ annual฀
agreements.
฀ Amounts฀ received฀ or฀ receivable฀ from฀ vendors฀ that฀
are฀ not฀ yet฀ earned฀ are฀ reflected฀ as฀ deferred฀ revenue.฀
Management’s฀estimate฀of฀the฀portion฀of฀deferred฀revenue฀
that฀will฀be฀realized฀within฀one฀year฀of฀the฀balance฀sheet฀
date฀is฀included฀in฀other฀current฀liabilities.฀Earned฀amounts฀
that฀are฀receivable฀from฀vendors฀are฀included฀in฀accounts฀
receivable฀except฀for฀that฀portion฀expected฀to฀ be฀ received฀
after฀one฀year,฀which฀is฀included฀in฀other฀assets.
Inventory฀Reserves
฀ We฀establish฀reserves฀for฀inventory฀shrink,฀as฀an฀increase฀
to฀our฀cost฀of฀sales,฀for฀our฀stores฀and฀distribution฀centers฀
based฀ on฀ our฀ extensive฀ and฀ frequent฀ cycle฀ counting฀฀
program.฀ Our฀ estimates฀ of฀ these฀ shrink฀ reserves฀ depend฀฀
on฀ the฀ accuracy฀ of฀ the฀ program,฀ which฀ is฀ dependent฀ on฀
compliance฀ rates฀ of฀ our฀ facilities฀ and฀ the฀ execution฀ of฀฀
the฀required฀procedures.฀We฀evaluate฀the฀accuracy฀of฀this฀
program฀on฀an฀ongoing฀basis฀and฀believe฀ it฀provides฀ rea-
sonable฀assurance฀for฀the฀established฀reserves.
฀ Reserves฀for฀potentially฀excess฀and฀obsolete฀inventories฀
are฀recorded฀as฀ well฀based฀ on฀current฀ inventory฀ levels฀of฀
discontinued฀product฀and฀historical฀analysis฀of฀the฀liquida-
tion฀ of฀ discontinued฀ inventory฀ below฀ cost.฀ The฀ nature฀ of฀
our฀inventory฀is฀such฀that฀the฀risk฀of฀obsolescence฀is฀mini-
mal฀ and฀ excess฀ inventory฀ has฀ historically฀ been฀ returned฀฀
to฀our฀vendors฀for฀credit.฀We฀provide฀reserves฀ where฀less฀
than฀full฀credit฀will฀be฀received฀for฀such฀returns฀and฀where฀
we฀ anticipate฀ that฀ items฀ will฀ be฀ sold฀ at฀ retail฀ prices฀ that฀฀
are฀ less฀ than฀ recorded฀ cost.฀ We฀ develop฀ these฀ estimates฀
based฀on฀the฀determination฀of฀return฀privileges฀with฀ven-
dors,฀the฀level฀of฀credit฀provided฀by฀the฀vendor฀and฀man-
agement’s฀ estimate฀ of฀ the฀ discounts฀ to฀ recorded฀ cost,฀฀
if฀ any,฀ required฀ by฀ market฀ conditions.฀ Future฀ changes฀ by฀
vendors฀in฀their฀policies฀or฀willingness฀to฀accept฀returns฀of฀
excess฀inventory฀could฀require฀us฀to฀revise฀our฀estimates฀of฀
required฀ reserves฀ for฀ excess฀ and฀ obsolete฀ inventory฀ and฀
result฀in฀a฀negative฀impact฀on฀our฀consolidated฀statements฀
of฀operations.
Warranty฀Reserves
฀ Our฀ vendors฀ are฀ primarily฀ responsible฀ for฀ warranty฀
claims.฀ We฀ are฀ responsible฀ for฀ merchandise฀ and฀ services฀
sold฀under฀warranty฀which฀are฀not฀covered฀by฀vendor฀war-
ranties฀ (primarily฀ batteries฀ and฀ roadside฀ assistance).฀ We฀
record฀a฀reserve฀for฀future฀warranty฀claims฀as฀an฀increase฀
in฀our฀cost฀of฀sales฀based฀on฀current฀sales฀of฀the฀warranted฀
products฀ and฀ historical฀ claim฀ experience.฀ If฀ claims฀ expe-
rience฀differs฀from฀historical฀ levels,฀revisions฀ in฀our฀ esti-
mates฀ may฀ be฀ required,฀ which฀ could฀ have฀ an฀ impact฀ on฀฀
our฀consolidated฀statements฀of฀operations.
Self-Insured฀Reserves
฀ We฀are฀self-insured฀for฀general฀and฀automobile฀liability,฀
workers’฀ compensation฀ and฀ the฀ health฀ care฀ claims฀ of฀ our฀
team฀ members,฀ although฀ we฀ maintain฀ stop-loss฀ coverage฀
with฀ third-party฀ insurers฀ to฀ limit฀ our฀ total฀ liability฀ expo-
sure.฀A฀reserve฀for฀liabilities฀associated฀with฀these฀losses฀is฀
established฀for฀claims฀filed฀and฀claims฀incurred฀but฀not฀yet฀
reported฀ based฀upon฀ our฀estimate฀ of฀ultimate฀cost,฀ which฀
we฀calculate฀using฀analyses฀of฀historical฀data,฀demographic฀
and฀severity฀factors฀and฀valuations฀provided฀by฀third-party฀
actuaries.฀ Management฀ monitors฀ new฀ claims฀ and฀ claim฀
development฀as฀well฀as฀negative฀trends฀related฀to฀the฀claims฀
incurred฀but฀not฀ reported฀in฀order฀to฀assess฀the฀adequacy฀
of฀ our฀ insurance฀ reserves.฀ On฀ a฀ periodic฀ basis,฀ we฀ also฀
review฀ our฀ assumptions฀ with฀ our฀ third-party฀ actuaries.฀฀
Management’s฀Discussion฀and฀Analysis฀of฀Financial฀Condition฀and฀Results฀of฀Operations฀(continued)