Advance Auto Parts 2009 Annual Report Download - page 64

ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
January 2, 2010, January 3, 2009 and December 29, 2007
(in thousands, except per share data)
.
F-11
Income Taxes
The Company accounts for income taxes under the asset and liability method which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the
financial statements. Under the asset and liability method, deferred tax assets and liabilities are determined based on
the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred
tax assets and liabilities is recognized in income in the period of the enactment date.
On December 31, 2006, the Company adopted the authoritative guidance under ASC Topic 740 for uncertainty
in income taxes and upon adoption recorded an increase of $2,275 to the liability for unrecognized tax benefits and a
corresponding decrease in its balance of retained earnings. Accordingly, the Company accounts for uncertainties in
income taxes pursuant to this guidance, which clarifies the accounting for uncertainty in income taxes recognized in
the financial statements. The Company recognizes tax benefits and/or tax liabilities for uncertain income tax
positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step requires the Company to
estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate
settlement. It is inherently difficult and subjective to estimate such amounts, as the Company must determine the
probability of various possible outcomes.
The Company reevaluates these uncertain tax positions on a quarterly basis or when new information becomes
available to management. The reevaluations are based on many factors, including but not limited to, changes in facts
or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes of
limitations, and new federal or state audit activity. Any change in either the Company’s recognition or measurement
could result in the recognition of a tax benefit or an increase to the tax accrual.
The Company also follows guidance provided on derecognition of benefits, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Refer to Note 15 for a further discussion of income taxes.
Advertising Costs
The Company expenses advertising costs as incurred. Gross advertising expense incurred was approximately
$65,431, $75,321 and $78,823 in Fiscal 2009, 2008 and 2007, respectively.
Self-Insurance
The Company is self-insured for general and automobile liability, workers' compensation and health care claims
of its employees, or Team Members, while maintaining stop-loss coverage with third-party insurers to limit its total
liability exposure. Expenses associated with these liabilities are calculated for (i) claims filed and (ii) claims
incurred but not yet reported using actuarial methods followed in the insurance industry as well as the Company’s
historical claims experience.
Warranty Liabilities
The warranty obligation on the majority of merchandise sold by the Company with a manufacturer’s warranty is
the responsibility of the Company’s vendors. However, the Company has an obligation to provide customers free
replacement of merchandise or merchandise at a prorated cost if under a warranty and not covered by the
manufacturer. Merchandise sold with warranty coverage by the Company primarily includes batteries but may also
include other parts such as brakes and shocks. The Company estimates its warranty obligation at the time of sale
based on the historical return experience, sales level and cost of the respective product sold. To the extent vendors
provide upfront allowances in lieu of accepting the obligation for warranty claims and the allowance is in excess of
the related warranty expense, the excess is recorded as a reduction to cost of sales.