Advance Auto Parts 2010 Annual Report Download - page 65

ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
January 1, 2011, January 2, 2010 and January 3, 2009
(in thousands, except per share data)
.
F-11
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
$78,809, $65,431 and $75,321 in Fiscal 2010, 2009 and 2008, 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, (ii) claims incurred
but not yet reported and (iii) projected future claims using actuarial methods followed in the insurance industry as
well as the Company’s historical claims experience. Effective January 1, 2011, the Company classified $50,292 of
its total self-insurance reserve as long-term because the timing of future payments is now more predictable based on
the historical patterns and maturity of the program and is relied upon in determining the current portion of these
liabilities. The Company includes the current and long-term portions of its self-insurance reserve in Accrued
expenses and Other long-term liabilities, respectively.
The following table presents changes in the Company’s total self-insurance reserves:
January 1, January 2, January 3,
2011 2010 2009
Self-insurance reserves, beginning of period 93,706$ 90,554$ 85,523$
Additions to self-insurance reserves 113,859 102,571 89,315
Reserves utilized (110,495) (99,419) (84,284)
Self-insurance reserves, end of period 97,070$ 93,706$ 90,554$
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