Advance Auto Parts 2011 Annual Report Download - page 66

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-12
the related warranty expense, the excess is recorded as a reduction to cost of sales.
Revenue Recognition
The Company recognizes revenue at the time the sale is made, and at which time the Company’s walk-in
customers take immediate possession of the merchandise or same-day delivery is made to the Company’s
commercial delivery customers. Sales are recorded net of discounts, sales taxes and estimated allowances. The
Company estimates returns based on current sales levels and the Company’s historical return experience on a
specific product basis. The Company’s reserve for sales returns and allowances was not material at January 1, 2011
and January 2, 2010.
Share-Based Payments
The Company provides share-based compensation to its employees and board of directors. The Company is
required to exercise judgment and make estimates when determining the projected (i) fair value of each award
granted and (ii) number of awards expected to vest. The Company uses the Black-Scholes option-pricing model to
value all share-based awards at the date of grant and the straight-line method to amortize this fair value as
compensation cost over the requisite service period.
Derivative Instruments and Hedging Activities
The Company’s accounting policy for derivative financial instruments is based on whether the instruments meet
the criteria for designation as cash flow or fair value hedges. The criteria for designating a derivative as a hedge
includes the assessment of the instrument’s effectiveness in risk reduction, matching of the derivative instrument to
its underlying transaction and the probability that the underlying transaction will occur. For derivatives with cash
flow hedge designation, the Company reports the after-tax gain or loss from the effective portion of the hedge as a
component of accumulated other income (loss) and reclassifies it into earnings in the same period or periods in
which the hedged transaction affects earnings, and within the same income statement line item as the impact of the
hedged transaction. For derivatives with fair value hedge accounting designation, the Company would recognize
gains or losses from the change in the fair value of these derivatives, as well as the offsetting change in the fair value
of the underlying hedged item, in earnings.
Accumulated Other Comprehensive Income (Loss)
The purpose of reporting Accumulated comprehensive income (loss) is to report a measure of all changes in
equity of an enterprise that result from transactions and other economic events of the period. The changes in
accumulated comprehensive income are reported as other comprehensive income and refer to revenues, expenses,
gains, and losses that are included in other comprehensive income but excluded from net income.
The Company’s Accumulated other comprehensive loss is comprised of the unamortized portion of the
previously recorded unrecognized loss on interest rate swaps and the net unrealized gain associated with the
Company’s postretirement benefit plan. The interest rate swaps, which mature in October 2011, are associated with
bank debt which we repaid near the beginning of the second quarter of Fiscal 2010.
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business
combinations accounted for under the purchase method. The Company tests goodwill and indefinite-lived intangible
assets for impairment annually as of the first day of the fiscal fourth quarter, or when indications of potential
impairment exist. These indicators would include a significant change in operating performance, the business
climate, legal factors, competition, or a planned sale or disposition of a significant portion of the business, among
other factors.