Advance Auto Parts 2006 Annual Report Download - page 79

ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 30, 2006, December 31, 2005 and January 1, 2005
(in thousands, except per share data)
cash flows. If the undiscounted expected future cash flows are less than the carrying amount of the asset and the
carrying amount of the asset exceeds its fair value, an impairment loss is recognized. Management utilizes an
expected present value technique, which uses a risk-free rate and multiple cash flow scenarios reflecting the range of
possible outcomes, to estimate fair value of the asset. Actual useful lives and cash flows could differ from those
estimated by management using these techniques, which could have a material affect on our results of operations,
financial position or liquidity. There were no reductions to the carrying amounts currently assigned to the
Company’s long-lived assets during fiscal years 2006, 2005 and 2004, respectively.
Financed Vendor Accounts Payable
In fiscal 2004, the Company entered into a short-term financing program with a bank allowing it to extend its
payment terms on certain merchandise purchases. The substance of the program is for the Company to borrow
money from the bank to finance purchases from vendors. The Company records any discount given by the vendor to
the value of its inventory and accretes this discount to the resulting short-term payable to the bank through interest
expense over the extended term. At December 30, 2006 and December 31, 2005, $127,543 and $119,351,
respectively, was payable to the bank by the Company under this program and is included in the accompanying
consolidated balance sheets as Financed Vendor Accounts Payable.
Lease Accounting
The Company leases certain store locations, distribution centers, office space, equipment and vehicles, some of
which are with related parties. Initial terms for facility leases are typically 10 to 15 years, followed by additional
terms containing renewal options at 5 year intervals, and may include rent escalation clauses. The total amount of
the minimum rent is expensed on a straight-line basis over the initial term of the lease unless external economic
factors exist such that renewals are reasonably assured, in which case the Company would include the renewal
period in its amortization period. In those instances the renewal period would be included in the lease term for
purposes of establishing an amortization period and determining if such lease qualified as a capital or operating
lease. In addition to minimum fixed rentals, some leases provide for contingent facility rentals. Contingent facility
rentals are determined on the basis of a percentage of sales in excess of stipulated minimums for certain store
facilities as defined in the individual lease agreements. Most of the leases provide that the Company pay taxes,
maintenance, insurance and certain other expenses applicable to the leased premises and include options to renew.
Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other
leases.
Closed Store Liabilities
The Company continually reviews the operating performance of its existing store locations and closes certain
locations identified as under performing. Closing an under performing location has not resulted in the elimination of
the operations and associated cash flows from the Company’s ongoing operations as the Company transfers those
operations to another location in the local market. The Company maintains closed store liabilities that include
liabilities for these exit activities and liabilities assumed through past acquisitions that are similar in nature but
recorded by the acquired companies prior to acquisition.
New provisions established for closed store liabilities include the present value of the remaining lease
obligations and management’s estimate of future costs of insurance, property tax and common area maintenance
reduced by the present value of estimated revenues from subleases and lease buyouts and are established by a charge
to selling, general and administrative costs in the accompanying consolidated statements of operations at the time
the facilities actually close.
From time to time these estimates require revisions that affect the amount of the recorded liability. This change
in estimate relates primarily to changes in assumptions associated with the revenue from subleases. The effect of
changes in estimates for the closed store liabilities is netted with new provisions and included in selling, general and
administrative expenses in the accompanying consolidated statements of operations. Closed store liabilities are
recorded in accrued expenses (current portion) and other long-term liabilities (long-term portion) in the
F-16