AutoNation 2006 Annual Report Download - page 49

Table of Contents
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Property and Equipment, net
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, while minor
replacements, maintenance and repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in Other Expenses (Income), Net in the
Consolidated Income Statements.
Depreciation is provided over the estimated useful lives of the assets involved using the straight-line method. Leasehold
improvements are amortized over the estimated useful life of the asset or the respective lease term used in determining lease classification,
whichever is shorter. The estimated useful lives are: five to forty years for buildings and improvements, and three to ten years for
furniture, fixtures and equipment.
The Company continually evaluates property and equipment, including leasehold improvements, to determine whether events and
circumstances have occurred that may warrant revision of the estimated useful life or whether the remaining balance should be evaluated
for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the property
and equipment in assessing whether an asset has been impaired. The Company measures impairment losses based upon the amount by
which the carrying amount of the asset exceeds the fair value. Fair values generally are estimated using prices for similar assets and/or
discounted cash flows.
Goodwill and Other Intangible Assets, net
The Company accounts for acquisitions using the purchase method of accounting. Goodwill consists of the cost of acquired
businesses in excess of the fair value of the net assets acquired. Additionally, other intangible assets are separately recognized if the benefit
of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the Company’s intent to do so.
The Company’s principal identifiable intangible assets are rights under franchise agreements with vehicle manufacturers. The
Company generally expects its franchise agreements to survive for the foreseeable future and, when the agreements do not have indefinite
terms, anticipates routine renewals of the agreements without substantial cost. The contractual terms of the Company’s franchise
agreements provide for various durations, ranging from one year to no expiration date, and in certain cases manufacturers have
undertaken to renew such franchises upon expiration so long as the dealership is in compliance with the terms of the agreement. However,
in general, the states in which the Company operates have automotive dealership franchise laws that provide that, notwithstanding the
terms of any franchise agreement, it is unlawful for a manufacturer to terminate or not renew a franchise unless “good cause” exists. It is
generally difficult for a manufacturer to terminate, or not renew, a franchise under these franchise laws, which were designed to protect
dealers. In addition, in the Company’s experience and historically in the automotive retail industry, dealership franchise agreements are
rarely involuntarily terminated or not renewed by the manufacturer. Accordingly, the Company believes that its franchise agreements will
contribute to cash flows for the foreseeable future and have indefinite lives. Other intangibles are amortized using a straight-line method
over their useful lives, generally ranging from three to sixteen years.
The Company has completed impairment tests as of June 30, 2006 and 2005 for goodwill and franchise rights assets. The goodwill
test includes determining the fair value of the Company’s single reporting unit and comparing it to the carrying value of the net assets
allocated to the reporting unit. The test for franchise rights assets requires the comparisons of estimated fair value to its carrying value by
store. No impairment charges resulted from the required impairment tests. Goodwill and franchise rights assets are tested for impairment
annually at June 30 or more frequently when events or circumstances indicate that an impairment may have occurred.
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